AVX Earnings Call Insights: Inventory Replenishment and Shift to Tablets

AVX Corporation (NYSE:AVX) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Inventory Replenishment

Matt Sheerin – Stifel Nicolaus: First question, John, regarding your commentary on backlog on book-to-bill. Those trends all seem to be pretty positive yet you are guiding – I don’t know if it is cautious guide or not, up 1% off of a fairly low base here. Are you just being cautious or are you really not seeing trends in end markets like you have any visibility into either inventory replenishment or any kind of growth here?

Markets are at 5-year highs! Discover the best stocks to own. Click here for our fresh Feature Stock Pick now!

John S. Gilbertson – CEO and President: Matt, a couple of things happened. The answer is straightforward is I am a little cautious. Once burned you’re little shy to lit that stove again, but if you look at the September quarter, things were starting to improve pretty good in that September quarter and apparently what we were seeing some build of inventory at the OEMs particularly to get ready for the holiday season. They put a lot of inventory in place. That bullishness that we saw in the September quarter did not keep up as we moved into the December quarter. Some of that is related to the volumes of some of the smartphones, all they grew dramatically. They didn’t grew to the level that some customers thought they were in the December quarter. So, they slowed down as the quarter progressed and one major customer actually pushed out a model until the first calendar quarter. So, I would say I am at this point, I’m more cautious than I am negative. Actually, we are pretty optimistic. If you look at that number, you can look at our book-to-bill and we’ve been building book-to-bill each quarter of the last three quarters, and we have to go back to see this level of backlog. We have to go back to March of – I sort of say December, be the September of ’11. If I looked at this morning, we haven’t had this backlog since September of ’11. So, I’m bullish, but also wait-and-see attitude.

Matt Sheerin – Stifel Nicolaus: That’s fair and on the — and obviously we are seeing from other suppliers and a very big smartphone manufacturer that looks like big swings in seasonality, and of course, you’ve got a lot of mobility exposure there, and I don’t know if that’s new normal or not where you see big swings inventory built at that those customers and then big cuts, are you still seeing the same things?

John S. Gilbertson – CEO and President: Yes, Matt. We are. It’s a good way to say it. I think the new normal is overused, but that’s exactly what we are seeing. We are seeing expectations of certain models moving through and build an inventory and then if the model then go then they are very hesitant taking more and we are also seeing as I tried to highlight in the (Meredith), a real mix around month-to-month of whose a player and whose not a player in the smartphones. It depends on models. It’s becoming much more models sensitive. It used to have pretty much standard model as of quarter-to-quarter. But now we’re seeing dramatic model changes within the quarters. So that’s making it difficult to predict what they are going to do.

Matt Sheerin – Stifel Nicolaus: Is that more difficult for you in terms of being designed in on certain products or there are more – do you have more commodity products in those end markets, so that it doesn’t make as much a difference?

John S. Gilbertson – CEO and President: We’re seeing more of the high-end components of the smartphone and we’re seeing that issue of where somebody wants to expedite those at the early point of a model launch, we’re very anxious to get all those components and (in case) they probably over order. Then when that model comes out based on how it moves through, they become more conservative on it. But we are seeing much more complex components go into the smartphones and the other thing that several of these suppliers have been heard on, I think maybe two quarters ago, we heard more of this, was not being able to get a critical component and then not being able to launch their phone, when they said they were going to. That hurts them in the marketplace. So they are very sensitive to not having that component available when they are going to launch a new model.

Matt Sheerin – Stifel Nicolaus: Then just my last question regarding that Nichicon acquisition; should we expect any significant restructuring? Obviously, you’re really not going to do much or plan much until the deal I done, but in terms of anticipation of any charges or any big changes to that business that could take time to turn that around?

John S. Gilbertson – CEO and President: No, we’ve looked at that Matt, and Kurt’s over there is shaking his head also. We don’t see any restructuring issues related to that. It’s (perky) clean. Now, as we mentioned several times in the past, we’ve got some changes to make in their process, but we also got some material that needs to be re-qualified and worked through. So we expect the real impact on them to improve their profitability, two to three quarters, based on a qualification of new material and our new lower price material getting in there. But truthfully that acquisition is going pretty good and it’s been accepted. What we’re nervous about was particularly protecting some of those Japanese automotive accounts and that is going real well. So, we’re positive at this point.

Shift to Tablets

Jim Suva – Citi: Congratulations to you and your team at AVX. Pretty volatile times we’re living in right now today. When we think about this mix shift to tablets, can you kind of help us compare and contrast AVX’s dollar value or content-as-a-tablet versus PCs, is it similar, is it higher, is it lower, how should we think about that? Also then just a clarification question on the EPA, can you help us understand the cash flow timing, so we can build that into our model?

John S. Gilbertson – CEO and President: I thought you were going to ask the more difficult question is, how is our tablets going to do emerging into smartphones. So that’s the question that we’re debating around here a lot. What’s going to be a tab, and what’s going to be a smartphone? But the basic answer is, we do better in a tablet, the mix of our product, I don’t have that dollar value, obviously, based on everybody doing it a different way. But if you put a touchscreen on any device, it puts more noise in the circuit and we get more components in there to, you might say filter it. But in truth, the more tablets we see, the higher our component usage goes up. So, — and we get more components in there and we get more higher value components as we see more touchscreen. So, the more touchscreens we see, the more functionality there is we are going to see more component using. So, for us a tablet, a $600 tablet has more dollar value. I’m starting to make a number, but it’s a pretty good number. It maybe that 18%, 20% number as opposed to just a personal computer, but that’s just the guess. Let me let Kurt handle the EPA finance issue.

Kurt Cummings – VP, CFO, Treasurer, and Secretary: If you’ve been following the issue, the EPA opened up for public comments on the settlement through the middle, the latter part of December and right now, we are waiting for the EPA to issue its public responses to those comments and then seeking court approval for the settlement. So, at this point, I really can’t predict when that will occur. The timing of the ultimate payments is the same as we’ve discussed in the past with approximately one-third going out after approval and then another chunky or later and the final payment in a year after that. So, the sequence hasn’t changed, but the timing of the initial payment isn’t unknown.

Jim Suva – Citi: That makes sense. Then the reason why I didn’t ask about the transition of smartphones to tablets, and what AVX’s position is there and maybe I’m incorrect, because I assume that a tablet is kind of just like a big smartphone, but maybe there is a structural difference. You’d mentioned that going from PCs to tablets. It’s a benefit given the touch surface really helps you out, but from smartphone to tablets, I just assume that was kind of comparable. Is that accurate and then finally last question is your end market percent if you can break that down, and then I’ll look forward to the next caller?

John S. Gilbertson – CEO and President: All right, Jim, my instinct there is that because of the size constraint, because of all the functionality on a handset smartphone, it is much more component driven than eventually perhaps the tablet would be, okay. In the early phases of a tablet, as you’re well aware any new design always uses a little bit more components, as time goes on it diminishes, but I believe that when we get through with this, when you set a tablet down versus a fully functional smartphone, you’ll see more components in that smartphone and when they merge, I’m not sure and we are having a lot of discussion about that and I’m not really sure we have a consensus on that. Moving to the issues as far as market segment, the automotive was 20%, the cellular was 16%, computer was 13%, consumer was 9%, industrial 13%. It’s interesting on industrial. We are seeing more wind projects than we are solar projects. The medical was 7%, military was 4%, networking was 4% and telecom was 14%.