Q2 2020 Earnings Call

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I would now like to hand, the conference over to your Speaker today, Mike Hufnagel Adx Chief Financial Officer. Thank you Sir the floor is yours.

Thank you Christine.

Good morning, I would like to welcome you to the IBX conference call regarding results for our second fiscal quarter.

I am like cost Nagel Baby Axis, Chief Financial Officer with me today is just commercial.

He acts as Chief operating officer, and Eric Prab, Avi extra senior Vice President marketing.

I apologize to anyone who is expecting to hear from Johnny Sarvis, Avi axis, President and CEO .

Unfortunately, Mr services are unable to attend todays call.

We hope you have had a chance to review our earnings release and related disclosures issued earlier this morning.

Overall orders continue to decline in comparison to the previous quarter.

Inventory levels remain high and the sales channel in the global economy continues to show weakness.

Global economic environment remains uncertain as international relations and trade regulations continue to put pressure on the global economy.

POS at our distribution customers continues to be slower than expected and is negatively impacting the order right.

Currently we do not expect orders to improve substantially until later in the fourth quarter of our fiscal year.

Yes.

Product lead times continued to decline on commodity and standard tantalum products.

What remain extended I'm certain high capacity I'm ceramics.

We're continuing to bring on additional capacity for high capacity ramps M.L. Ccs.

And these improved lead times are contributing to the reduced order rates.

[noise] sales in the December quarter are expected to continue to reflects the increase inventory levels that our customers.

This was a tougher economic environment in all regions.

Resulting in a sales decline of approximately 6% compared to the September quarter.

Our backlog has declined in light of market conditions remain strong at continues to support long term growth.

[noise], Yes mentioned markets continue to show weakness this quarter once again being led by the slowdown in Chinas economy.

Along with a slowdown in automobile sales and production in all regions.

As a result of this along with the higher inventory levels in the distribution sales channel.

Overall sales in the quarter were 377.3 million a decline of approximately 6% compared to the June quarter.

[noise] during the quarter, our direct business to OEM, an M.S. customers increased by 2% to 64% of our total business.

The distribution channel represents 36% of our overall shipments.

Global Pos was down to the previous quarter by 8% in the Americas in Europe .

Asia was slightly up to the previous quarter.

Our overall distribution book to Bill was negative as a result of the inventory built through the first half of the calendar year for commodity products.

We have worked and we'll continue to work very closely with our distribution partners to reduce their inventory levels.

We expect contrasting distribution shipments through the December quarter to further align inventory levels.

We estimate the Pos will be flat in the next quarter facing the typical seasonality and a further inventory correction in North America in Europe [noise].

We expect disappear Western Asia will be similar to the previous quarter and inventories will continue to decline throughout the quarter.

[noise] the overall book to Bill for Avi exiting the quarter was 0.93.

Total bookings declined approximately 15% to the June quarter.

The Americas were down 16% to the previous quarter, reflecting the high inventory levels and standard commodities that are distribution partners.

And turn the debate man for advanced components in the high rail market remained strong.

Your bookings were down 11% to the previous quarter, reflecting a softer demand from the automotive industry.

Asia bookings were also down 19%, whereas the overall Chinese market remained under pressure due to the trade conflict and weaker consumer spending.

Regionally and looking at our revenue split market conditions in the regions were relatively unchanged from previous quarter.

As a result, each region share of the market was also relatively unchanged with the Americas at 29% Asia at 29% and Europe relatively flat at 42% of our sales.

[noise] in general the global economic environment remains unfavorable.

Uncertainties in relation to international relations and trade regulations continue to put pressure on the global economy.

The macroeconomic conditions continue to be on your pressure with most major economies experiencing quarter on quarter contraction for many economic indicators.

Global industrial production slow to 0.6% year on year.

Hi remains in contraction territory at 49.1 for the fourth consecutive months.

I will now address the various market segments.

Automotive represented 44% of our total revenue one pork, 1% off from the previous quarter.

As we continue to win market share in a general weaker automotive market with increased vehicle electronic content.

The global automotive market continues to experience headwinds with light vehicle sales still down year on year. After a strong 2018.

One exception is the Japanese market, which is up 6% year on year.

The Chinese market, which is the largest market with 31% of the global light vehicle sales is down 8% year on year, but up 6% month on month.

Overall, we expect light vehicle production as sales to be under pressure in the foreseeable future.

The electronic content and vehicles will continue to increase at a rate of 11% per year.

We continue to experience strong design and R&D activities of our customers are virtually all electronics products, we offer like a dash improve infotainment.

Vision systems instrument clusters.

Breaking systems.

Body controls.

Electronic power steering and powertrain.

On a positive note this past quarter was our strongest program when record in these applications.

We continue to invest in developing products, such assessors modules Super capacitors.

We see link capacitors polymer, okay, capacitors and RF components the support for these applications.

[noise] global computing, and consumer which represents 16% of our total revenue at both positives and negatives during the last quarter.

Tablet shipments were under pressure, whereas the worldwide PC shipments showed a modest increase in the third quarter to 68 million units.

We also experienced a continuous positive development on cloud storage and online gaming opportunities and are confident that we will see further growth throughout the year in this cycle.

Our networking and telecom revenue was stable at 11% of our total sales.

We are seeing more component demand from income increased satellite to Paul deployments from around the world for various commercial applications such as Fiveg communications.

The steady conversion for Fiveg continues to fuel new design opportunities some future growth.

Fiveg technologies relying in large part on high capacity transmission using high frequency short length radio ways with short ranges.

This results in higher component demand for our antenna infill capacitors RF components ml Ccs and filter products.

Our high rail military and aerospace market remained strong in both segments. We continue to achieve robust growth rates with two major aircraft manufacturers in the world maintaining a healthy backlog of new aircraft orders.

The electronic content of these planes or avionics. This following this growth and requires leading edge components from Avi export Dow and in the future.

Our backlog for these applications continues to be strong and we expect demand to be robust for the foreseeable future.

Defense spending is focused on three key areas cyber security Smart technologies and agile forces.

All three of these initiatives are built on leading edge technology and increased demand for leading edge electronic components.

Our backlog for specialty and Mil spec components remains strong.

We continue to expand in our technology and manufacturing capabilities to meet the growing demand.

Our focus is maintaining our position as a strategic partner with our customers on defense industry.

Thanks.

The high reliability implantable device medical market as a primary source of baby X's medical revenue.

These devices include pacemakers, implantable defibrillator and neuromodulators for the treatment of pain or tremor conditions.

In the most recent quarter revenue growth for our in customers in these markets slowed from the typical 5% to 6% range to around 1%.

Market price competition between the three major suppliers is held revenue down while unit sales have increased in the low single digit range.

This allowed us to so show growth in our business in this time period.

We continue to hold the dominant position for the products, we supply into this market.

Our working with their customers on their next generation of products and to include other ABS products into their devices.

In addition, we've expanded our market penetration.

Our customer base to include manufacturers in other countries.

We have experienced a lot of headwinds from the slowing market due to the reasons discussed earlier, plus a stormy macro environment, where inflation tariffs and trade disputes continue to be key issue.

We trust and an overall long term growth for our electronic components and interconnect sensing and control devices based on R&D activities. We are involved in.

With several new customer applications, which will lead to future volume markets for electronic components like Aiotv I O T Fiveg smart home grids, smart cities, and agriculture robots and drones Wearables three D printing.

Health care and further electrification of cars compared to new auto applications and safety and now.

Our gross profit percentage was 21.1% four points down to the previous quarter, reflecting a different mix of product shipments and some pricing pressure on low cost commodity MLC low CV and standard tantalum products.

With expected margin pressure, we will continue to focus on margin management and cost reduction programs to improve margins.

Total SGN a expenses increased slightly this quarter to 42.1 million or 11% to 11.2% of sales consistent with the prior quarter.

Our overall effective tax rate for the quarter was 18.5%, including discreet items.

Excluding discrete items, our tax rate would be approximately 21%.

For the quarter, we paid 19.4 million and dividend payments and spent 34.8 million first for facility improvements and equipment purchases.

Depreciation expense totaled 19.6 million.

Intangible amortization expense was 3.5 million.

For the quarter cash flow from operations was approximately 58.6 million.

As mentioned, we currently anticipate sales or this September quarter could be down in the 6% a train.

We estimate the gross profit margin. It's in the December quarter will be in the 21% to 22% range, reflecting some pricing pressure, particularly at commodity tantalum ceramic products being offset by lower manufacturing costs related to cost reduction initiative.

Total selling general and administration expenses should come in between nine and 10% of net sales and the blended tax rate should be approximately 22%.

We are facing a different difficult market environment over the next couple of quarters.

Our we are optimistic about our future prospects as our design win pipeline continues to expand.

Driven by the introduction of innovative products designed to address stringent application requirements required in today's market.

I would now like to open it up for questions.

And as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q and a roster.

And you have a question from Matt Sheerin of Stifel.

Yes, Thank you and good morning, Mike.

Just a few questions if I could just start Mike can I ask you and I know you gave some of the end market break down could you be more specific in terms of the percentage of revenue for each of your key end markets sure Matt. Thank you.

Automotive at 44%.

Cellular at 11%, which is up 1%.

Computer 11%.

Consumer 5%.

Industrial at 8%.

Medical at 6%.

Military at 4%.

Networking at 3%.

And telecom at 8%.

Okay. Okay, Great and then could you also gave the product breakdown.

That's correct.

Yes sure Matt.

Ceramic components at 23%.

Tantalum components at 16%.

Advance components at 29%.

And inter connect sensing and controls at 32%.

32%, Okay. So look like the it looks like in the ceramic business.

Was down.

Pretty significantly sequentially is that correct.

The ceramic it was down about 4% sequentially, 4% okay. Okay.

Is that could you talk about just in the ceramic your I know you said, there's still some extended lead times on the large case size.

For auto and specialty areas.

Are you still seeing strength in some of those.

Areas in terms of orders and.

Overall demand.

The orders for the high CV ceramics, and the advanced components, particularly as it relates to military medical et cetera continue to be in high demand and the lead times on those still remain extended.

So.

All that demand that demand is holding up the problem is more in the commercial ceramics, where the demand is down due to the inventory issues primarily at our distributors.

And at some of our customers.

Okay, and I know you've talked about some of your competitors moving some discontinuing certain product lines were you play I'm are you still seeing visibility into that sometime next year.

Limited visibility into it.

Continue to we continue to focus on.

We told you before the expansion in our polymer market in the and then on the high CV ceramics, where the demand is holding up.

You bet demand to hold up long term.

Okay, and speaking of the tantalum, which I know has been under pressure more than than ceramics down significantly year on year.

What's the inventory situation at distribution now in terms of weeks I know is as high as sick Im sorry months I know is six months at some point.

Yes, Matt the inventories at the distributors is still in excess of six months.

And it's not coming down as quickly as we would like it too.

We are normal is as we said in the past is three to four months. So we expect that inventory issue to go one throughout the next quarter and into the fourth quarter.

Is that is that primarily on the tantalum business or the commercial ceramics as well, it's on the tantalum and the commercial ceramics.

Okay handle them is getting a little bit better, particularly in Asia.

But in the U.S. it still us in Europe , we're still seeing.

Pretty healthy inventory.

Okay, and then the gross margin, which was down it looks like your looks like you can maintain it at these levels you did talk just about some restructuring or some.

Cost cutting programs could you be more specific about what you're doing are you taking capacity offline.

We've taken some capacity offline to be more aligned with market conditions, where they are so thats resulted in headcount reductions in certain factories.

You know in at least in the short term until volume comes back.

You know those reductions certainly have.

Contributed to some of the higher costs, but long term, we expected to help us will maintain margins where they are.

Okay and then what was the reason for the relatively inflated as she in a number I mean year over year. It was up a bit I know you have some ongoing legal expenses was it related to that in some way.

Partially its related legal expenses and partially as related to you know it takes time to reduce some of these costs.

Reduction programs will take some time, particularly.

In European region, when you're trying to address headcount reductions.

You can't just walk in there until people, they're gone tomorrow, its little bit different in the us, but it'll take some time to bring that number down in line with the with the sales number.

Okay. So you are slowing those costs right through the PM now in Miami, taking charges extraordinary charges, but absolutely okay normal business. These days, Okay and then.

On the Fiveg side, and you talked about.

Hum.

Steady demand there, but if you think about the the content increase in fiveg versus Fourg in base stations for whether it be both tantalum polymer and ceramics, what's that opportunity.

I'm going to pass that question on two aircraft, our senior Vice President of marketing.

Great Hi, Eric.

Fiveg opportunities as opposed to Fourg.

Yes, Hi, we continue to see that market grow with fiveg, both in infrastructure and devices.

Yeah.

Certainly China's leading the way with that so theres a lot of opportunities in China.

The mix of product being used in Fiveg also.

Is it infrastructure, so that mix of product fits well with our portfolio. So we're seeing a lot to.

On the base station side.

Certainly.

10, as we do are going into Fiveg handsets, and we're now seeing some growth there, but you know some of the projections are.

By 2020 325, so the handsets now will be Fiveg, we're already seeing fiveg capable handsets. So we're still in the early stages of it but over the next 12 to 24 months, we'll see a lot more momentum both with to Fiveg infrastructure in Fiveg devices.

Okay, Okay, I think thats it for me thanks very much.

Okay, Matt Thank you.

And there are no additional questions at this time.

Okay. Thank you Christina and thank you to those who joined our Q2 call Johnny and I look forward to speaking with you again in January with our Q3 results.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.