艾睿電子 (ARW) 2005 Q4 法說會逐字稿

Good day, everyone. Welcome to the Nu Horizons fourth quarter fiscal 2005 earning results conference call. [OPERATOR INSTRUCTIONS] For the purposes of the Private Securities provisions and the Private Securities Reform Act of 1995, our statements may include certain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Such statements are based upon, among other things, assumptions made with information currently available to the management, including management's own assessment of the Nu Horizons industry and competitive landscape. [OPERATOR INSTRUCTIONS]

Now for opening remarks and introductions, I would like to turn the conference over to Mr. Richard Schuster, President and COO of Nu Horizons and President of our NIC Component subsidiary. Please go ahead, sir.

Thank you. Good afternoon and welcome. I am Richard Schuster, President and COO of Nu Horizons Electronics Corp. With me here today are Arthur Nadata, Chairman and CEO, Paul Durando, the Company's CFO and David Bowers, President of our North American semiconductor division.

Paul will go over the numbers for our fourth quarter and fiscal 2005 year-end, I will then give a brief market overview and synopsis of the industry and our Company's performance. Arthur will follow with some additional comments on certain recent developments. And finally, we will turn the meeting over to questions from our callers. Now, I will turn the call over to Paul Durando.

Thank you, Richard. For the year ended February 28, 2005, net sales increased to $467.8 million, up from $345.8 million in the comparable prior-year period, an increase of 35%. Net income for this year was $3.073 million, or $0.18 per basic share, versus the loss of $845,000 or $0.05 per basic share in the prior fiscal year.

Net sales for the fourth quarter ended February 28, 2005, increased $114.2 million from $102.0 million for the comparable period last year. Net income for the current quarter ended February 28 was $116,000 or $0.01 per basic share, as compared to net income of $409,000 or $0.02 per basic share for the prior-year quarter. We continue to maintain a strong equity position of approximately $128 million, with a working capital ratio of 7.2 to 1.

Now I will turn the call back over to Richard.

Thank you, Paul. For the past four years, we have been telling our shareholders about the challenges our industry has faced. We must say, again, that the events and changes have been no less than revolutionary when viewed from management's collective years of perspective in the electronics distribution market. The market took a 360--degree turn from the shortages and booming growth of the late '90s and year 2000. From a rational exuberance to frustration and even fear, we saw our industry virtually fall off a ledge into to a new era of overcapacity, severe price erosion, shifting markets, outsourcing and extreme cost demands.

In addition, due to these conditions and their resultant pressures, the industry has been experiencing a wave of consolidations and closings that continued until recently. Many component makers have put market share ahead of profitability, and EMS providers are pressuring these manufacturers to meet their constant low-cost needs. Driving this phenomenon are the consumers and businesses that demand quality innovation, speed-to-market, multi-functions, and all at bargain pricing.

At the same time, there has been unprecedented growth in China and Southeast Asia markets. Using their low-cost labor, under-valued currency and government backing, they became leaders in production for the electronics industry. In addition, these regions are experiencing a growing consumption that motivates manufacturers to keep their production in a low-cost production region that is also close to their customers.

Nu Horizons looked at these startling trends and realized that we had to either adapt to the new market reality or melt away with other smaller distributors. We decided to focus on three major goals, which were designed to enable our Company to be a viable survivor of this dramatic evolution.

Number one was to increase our market share, so we could be important to both our suppliers and customers. To do this, we required a business model that gave us more value to the supplier and customer. We had to distinguish ourselves from the much larger fullfillment distributors. Consequently, we put our efforts into design creation and engagement with a limited number of high-technology suppliers. This market share could not be attained only through our traditional channels in North America. We had to enter and expand in the challenging Asian market.

In 2002, while in the midst of an industry-wide recession, we invested in establishing operations in this region. Today, we have 13 offices in Asia with over 110 sales and support personnel. In fiscal 2005, our sales surpassed $100 million, almost doubling from the previous year. We believe our growth is in its early stages and, with additional franchise lines, we can continue this dynamic expansion of market share. At the same time, we believe our strong North American sales and engineering team continues to outpace our competition in design wins and new customers.

Our second goal was to maintain a strong balance sheet. This would help us to attract new suppliers and talented employees. It would give of us the opportunity to invest in exciting new initiatives and inventory programs that the Company believed would be strategic and profitable. Today, we boast one of the best balance sheets in electronics distribution. With a debt-to-equity ratio of .2 to 1 and no goodwill on our books as of February 28, 2005, we can provide our shareholders with value and security. While the need to borrow will grow as sales accelerate, we continue to diligently manage our assets and invest with fiscal prudence.

Third, but not least, is our commitment to becoming a more profitable company. This has been extremely challenging in light of market conditions and our desire to invest for the best possible outcome in the future. When do you stop investing and concentrate on profits is a common question from our shareholders. This balance is always difficult because short-term profits without regard to longer-term investments, could compromise the future of our Company. We are pleased to have returned to profitability for our fiscal 2005, but we are by no means, satisfied. Our revenues increased by 35% year-over-year, our market share increased in many categories, and we continue to work to achieve increased productivity and higher gross margins.

In summary, we see positive trends for our Company, even in a continued challenging market. We believe that opportunities are out there for our model of design creation that is needed more than ever by our customers and suppliers. Now, Arthur Nadata will comment on some very current developments in our industry.

Thank you, Richard. Within the last few weeks, a major acquisition was announced in our industry. The purchase of Mimic by Avnet Electronics moves Nu Horizons fourth in sales in North America semiconductor distribution. More profoundly, however, we believe it gives our suppliers and customers more reason to consider us as a viable option to their already reduced distribution channel. As a highly-focused solution provider, we expect that Nu Horizons will begin in a more advantageous position to reap the rewards of this consolidation.

Overall, I am very pleased with the performance of each of our operating groups. In addition to our distribution business, NIC Components continues to penetrate new market segments with their expanded product line and wide range of customers. And Titan continues to successfully provide supply chain management solutions to a variety of customers. In conclusions, we delivered results in fiscal year 2005 from top-line sales to posting of profit in each quarter. Inventory is back in line with sales and we'll continue to monitor and make investments as warranted. Our continued focus on new business developments globally is opening new opportunities for us. Asia remains a growing region for Nu Horizons and our strong balance sheet will continue to allow us to invest in future. Thank you and I will now open the conference call up to questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll hear first from Matt Sheerin, Thomas Weisel Partners.

Yes, thanks. Hello, everyone. So let's start off, I guess for Rich -- Richard and Arthur, the question of profitability and, the whole issue of whether you continue to make investments for the future or try to keep a lid on expenses and finally start to see some profit margin improving. So my question is related to the opportunity that you see with Xilinx, are you saying you're going to continue to invest and we're going to see expenses go up, before we get those kind of returns that you have been talking about?

Well, you know, to your answer, Matt, I think there certainly is a balance there, but we will have to, and I think it's warranted for us to continue to invest, where good opportunities arise that we will not see in the future. But like I say, there is a balance there. We have to make sure we do invest in the proper areas that will continue to help the Company grow.

Okay, so -- okay, so can we get a more specific answer, then? What -- I mean where should we think about expenses going? I mean, they were up a little bit this quarter, up 2 million year-over-year and you had a $100,000 profit in the last quarter on the $12 million year-over-year increase. So I'm trying to figure out what, and you had declining gross margins, so maybe can you answer it another way. What are your short- and long-term operating margin goals for the Company and how do you get there?

Well, I think -- this is Rich, Matt -- I think there are extraordinary opportunities that we certainly have to look at. I think what we're doing is being extremely prudent in terms of looking at the ROI and the length of time needed to attain that ROI. We, with our basic model right now, we feel that we have our overheads in order, and we're looking to grow volume. But, in light of some further consolidation in the industry, we certainly can't look away from additional investments, if we see that they will bring shorter-term results.

What kind of opportunity, then, from Xilinx? Have you looked at a specific revenue number that might be available?

We're not really sure what opportunity there is yet with Xilinx, Matt.

Okay. I'll -- okay. And then on gross margin, it was down a little bit, well, I guess 20 basis points, and obviously, as you get more volume in Asia, you've seen the margins decline. What should we think about gross margins, I mean, for the next fiscal year, for instance. Is it going to be in that area or is there more demand-creation opportunities to bring that up?

Well, Matt, I'm going to take a shot at answering that. This is Paul. Our target has always been to reduce our operating expenses as a percentage of sales, and we've been doing that over the last eight quarters, which is why we return it to some profitability. Eight quarters ago, we were at 21% SG&A, as a percentage of sales, and today, we're 15.8, even though it's up a tish (ph) from two quarters ago, which we had gotten as low as 14.5. That's still always the game and that is to reduce your SG&A as a percentage of sales quicker than any margin reduction you may have to absorb.

That said, assuming that we continue to be successful in Asia and we continue to grow our sales number in Asia at a greater pace than we do here in the states, our margin is going to creep down, I would think, because that business, by and large, is going to be at a slightly lower margin. Taking the opportunities that the recent consolidation might be giving us out of the mix, and we think the coming year we would have been successful at actually reducing that number, both numbers, the percentage of SG&A, the percentage of sales, as well as the actual dollar number itself. But given what the opportunities that are being presented are, we may not be able to take that route and, as Arthur mentioned, there may be some opportunities from investment that the Company really just can't pass up.

Uh-huh.

Matt, I would say that our demand creation margins have continued to stay very stable.

Uh-huh.

While obviously increasing that would help , and we're still relatively new in Asia. There has been a -- you know, most of our customers are very new. There is a buy-in there to start to get their business and confidence, and as you do grow relationship with a customer historically, you're able to increase your margins as you get more into the customer base.

Uh-huh. How close are you to profitability in Asia?

How close are we?

Are you profitable in Asia?

We're profitable in Asia.

You are. Okay. Just a couple of quick things and I'll let other people ask questions, but on the -- what is happening on the demand side? You were down a little bit. I imagine thee's some seasonality in December there, but what are the bookings looking like, both on the Component side and the semiconductor side? What are your expectations shorter-term. Are you back looking at revenues starting to grow again?

Well, we can't speak much for the first quarter, but we did have December in our Q4 and that is historically slow or a half a month. Okay, business is fairly active for us now. Okay, Dave, you want to add anything to that?

I think you got it. December was very soft for the industry, and we had a particularly soft December. Bookings through the quarter were, through Q4 were strong, and activities continued strong since then.

Uh-huh. Well, you're halfway through the quarter now, are you expecting to be at least flat, if not up? Or was it hard to tell?

Well, (inaudible) -- if don't mind --

Actually, we know the answer. We --

You don't want to say. Fine. Just on the tax rate -- .

Good one, Matt.

Well, I'm just -- okay. Just on the tax rate, Paul, what should we be thinking about going forward?

I think it should stay about the same. I wouldn't want to reduce it.

Around 38 or so?

Uh-huh.

Okay.

That's a blended rate, of course.

Yes. Okay. Okay. Thank you.

Moving on, we'll hear from Robert (inaudible)

Hi, Art and Paul.

Hi.

Hi.

I have a question. What areas are you seeing strength or weakness from in terms of end-markets, and how do your revenues break up by different end-markets, if you track that?

I think he's talking about --

You talking about the active side and the components?

Yes.

Yes, well honestly, it's been pretty, pretty steady over most areas. There aren't any really severe shortages, but there doesn't seem to be any real major pricing pressure. Is there still is on flash and some memory products, but analog Is still strong. We're seeing more of some of the discrete commodities, especially discrete transistors and those type of product. As far as market segment, communications picked up for us. Industrial continues to be fairly active, but, you know, we have a lot of long-term design cycles in some of these product areas as well. Our design activity is up significantly. Dave, you might want to add to any of that?

There are three primary -- from a market segment standpoint, there are three primary businesses for the distribution.

Uh-huh.

The component distribution business. So, communications is the largest by a little bit in terms of segment. And that's approximately a third of the business. The industrial and instrumentation businesses are pretty [expletive] close to that, and information, which includes both computing and storage, are not far behind that. So that's, that business is in the high 20s. And then military is a stable business for us and consumer products is a growing business for us. I would say within those segments, their percentages have been relatively stable over the past year. We have seen more growth in communications, a little more growth in communications than the others.

Okay. And in terms of design activity driving growth, are you picking up new customers or is it designs within existing customers and have you added new products to the line card or new companies to the line card?

Dave?

We have picked up new customers.

Uh-huh.

We have done a better job of penetrating existing customers by selling better across our -- by designing better across our line card. From a new supplier standpoint, we actually haven't signed major new suppliers since Linear Tech. So, in fact, we have been gaining position and share pretty much across the board with our suppliers over the last few years. But we're still relatively small with significant companies like Linear Technology, for example.

Your representing Linear Internationally or in Asia, is that right?

We represent them in the Americas.

In the Americas.

And then we do have, with all of the suppliers that we represent, we have rights on business that is developed in the Americas and transitions to other parts the world. Asia, in particular. We do have rights to follow that business and close that business in other parts of the world, and that's becoming a more significant portion of our business going forward.

All right, are you at all trying to address, I guess, the trend where things are being designed in Asia? Manufactured in Asia?

Absolutely. We're actively working to expand the line card in Asia, and we deploy a very similar model there, with heavy engineering focus and heavy field application engineering resource. We have about a dozen suppliers that we represent in Asia and the Americas today. That's where much of the emphasis is in Asia, building that demand creation business as well.

Okay. Another question sort of about inventory turns. Where do you see that trending? Are you trying to meet a certain target or concern. Is it --

we'll take a shot at that. It's Paul. As I mentioned when this question was asked in prior conference calls, we really don't manage to terms. And that's not -- I'm not rebutting your question. What I'm saying is that in some companies, the terms are, you know, you almighty and known violates the terms. We have never managed the Company that way. We try to, obviously, maximize terms as much as we can. But our product people are instructed to make sure they have the proper product in the pipeline and ready to go, and not so much because they're violating turns by a half a turn that.

That said, at February 28, our term's computed out for the first time to be a little over four. I think there were 4 1/2, 4.6. To be very honest with you, as the first quarter's unfolded, they're down closer to four -- four again, maybe have gotten a touch under four. So, they do fluctuate. Obviously we would like to be at the 4 1/2 level most of the time, but in reality, we usually fall short of that more like the three's and four.

Right.

And I'll just add to that. I think inventory is geared more towards mix and opportunity than it is toward terms.

I guess if you're looking at opportunity, that you would maybe look at your inventory relative to your pipeline?

Well, opportunity based on customer and based on opportunity partnerships with suppliers, things such as that. I mean, everyone has their A's and B's, and we have our A pipeline items, and that's basically just ongoing normal business. But, as you know, our supplier line card is very unique and a lot of the products we handle today are proprietary or only manufactures by, maybe, one or two suppliers.

Right.

So, we really view our inventory much different than a fulfillment distributor would. That's why I say it's more by opportunity and mix than possibly dollar amount or terms.

Right. What are your terms of growth? Growth for the Company? What would be a good year for you, a bad year for you, and a great year?

Revenue growth?

Yes. Actually benchmarked to your performance this year.

We'd love to see a 20% growth this year. We know the industry is going to be tough. We have a lot of things we think we have a strong upside with, both here globally. We have pretty aggressive plans. Would we be happy at 15? Possibly. Less than that, I doubt it.

Okay.

It's a crystal ball thing. We do have our budgets, though.

Right and were there any 10% customers in the quarter or 10% product lines?

What do you -- .

Well, we have a -- we continue to have about three product lines that are steadily a little bit over the 10% area, which normally would be a Sun of the test in Xilinx. They kind of switch around. As far as the 10% customer, no, I don't think so. I'd be very surprised. But that's pretty stable for us. How it runs throughout the year.

Right.

We might be able to find the 10% customer in Asia. I'm not going to swear we don't have one.

Not overall.

But it's not -- we don't have tons of them.

Not overall.

How is the Sun business trending? Is it more up? Are they entering the new markets or is there increased business for demand for those products?

Dave?

Yes. In the OEM space. and that's our role with Sun, there is. They are, especially with their new Solaris 10 over Opteron platforms. We are seeing increased success with Sun in the OEM-embedded applications; communications, medical in particular.

Okay.

So it's trending positive.

That's a big-ticket item for you, right?

Very high-selling price. Right.

Right.

Relatively low margin. Very high-selling price.

Okay. Great. Thank you. Good luck.

Thank you.

Thank you.

We'll now hear from Steve Peak. He is a private investor.

Hi, guys. I just wanted to follow-up on some of the SG&A trends. I think it was about six months ago, six to nine months ago, Paul had mentioned that, for every million in sales that there, you know, we could expect to see SG&A go up by a certain amount. I think it was like 50ish -- or --

40,000 or 45,000.

Okay. So what caused you guys to miss that pretty badly?

Well, the fact is that that's a gi -- you know, the given there is that you keep your profile the same. What happened was that we continued -- we needed to continue to open new branches in Asia and also add more people in Asia. This year we're up a good 40 people in Asia.

Yes.

Over the year before.

Yes.

So, and also Sarbanes, and I'm not blaming it all on Sarbanes, but Sarbanes-Oxley did add a good 350 to 400,000 to our overhead.

So that -- those costs, since it was the year-end quarter, showed up in this, the number that got above 18?

No, the year-end quarter increased from the November quarter about a half a million. Not actually. The overhead's increased, I think, even a little less than that -- 400,000. From sequential now you're talking about, right?

In the current quarter when you got up above 18 million.

Right, these -- that's 400,000 more than it was in the November quarter. And FICA also kicks in in the first quarter -- I mean, in the last two months of our fourth quarter, and a lot of FICA is not there in the third quarter. Plus, there was some additional Sarbanes expenses and several other, you know, ups and downs in different categories like insurance and professional fees, et cetera.

Okay. So if revenue -- .

When you look at it, when you look at it from a trend view-point, the fact that sales also dropped $2 million in the quarter is what combines with that increase in SG&A to cut our bottom-line by $300,000.

Sure. If revenues were flat, do you think you can cut out of this 18 million level back to like 17 1/2 or is this just the new level of SG&A to put in?

I think if revenues were flat and we don't increase anything anywhere else, and by that I mean people-wise in Asia, you probably could see this 18 million come back down to a 17.8 or 17.750 in the first quarter. That said, I don't know if that will occur, because number one, I don't think sales will be flat. It's never exactly flat. It's either up or down. Hopefully, the sales will be up a nice bit or Arthur's projection of the 15 to 20% increase in sales this year over last is not going to work out too well. So, maybe that's a little hint.

But yes, I think sales will be different, and so the overhead will probably be slightly different.. I'm not trying to discourage your question, but if you look at the last eight quarters, our SG&A as a percent of sales was 21, 19.3, 17.1, 15.8, 14.5, 14.5 and then 15.2 and 15.8, and the reason that it went back up to 15.2 and 15.8 wasn't only the dollar increase but rather the fact that sales went in those quarters from 119 to 116 to 114. And I think that's turned around now and headed in the right direction.

Right. Okay. It's just things looked good six months ago, like it was kind of right on track there.

No, you're absolutely right. We were not happy either.

How about on the inventory front where there was a pretty good drop in inventories this quarter. Was that a function of the increased turns?

Well, let's put it this way. You saw sales go from 119 to 116 to 114. At the same time, back in August, this little drop that we experienced over the last six to eight or nine months, it's not just us. The industry, the semiconductor business in general, experienced it. And so we had pipelined the inventory, not for sales of 116 or 114, but for sales for 125 and 129, et cetera, et cetera, because we thought that the -- that we -- that the up and to the right would continue. So, in November, the inventories looked high. It was nothing dangerous but they looked high. We reached the peak of $116 million in inventory. Now with the end of a year, we're down to 81.

But we also said at that time-period that by our year-end, inventories would be blind. We jumped on certain opportunities that came available, both from suppliers and customers, and we participated in those agreements. But we knew that inventory turns or inventory would be back in line by the year end and that's what occurred.

Let's go back to the year-end, where you see $81 million. When we were at the year-end, and this goes back to mid-February, late February, we determined that our inventory was going too low.

Right.

We actually had a meeting, and I'm not going to tell you our inventory is 81 today, because it's not. And we decided to pump up the inventory again because we needed it for additional sales, and we think we were correct, because we think sales are going the other way now. So, it is a bit of a game that you play. You know, sometimes you're absolutely right, sometimes you're not. But we have never been burned by it, other than the fact that, maybe, you spent a few interest dollars too much to carry it.

Okay. That's good. I guess another thought just on the stock price here. The last I checked, a good number of members of management and members of the board were significant shareholders and have been for quite sometime, with the stock going to $6. I mean, as it gets more and more below the book value of the Company, you know, if it were to go to five to four to three, hopefully not, but if it were, is there anything that the board or management is prepared to do to defend the value, shareholder value?

You're talking about possible buy-back?

Well, I guess either. To get the stock price higher, right now, you're earning $0.15, maybe $0.20 annually on a $6 stock, which isn't a very big yield. But the book value and the balance sheet is there to support the stock price. So, either, I could see three things. Either revenues need to be dramatically higher, but that's somewhat out of your control. Costs need to be cut dramatically, and it sounds like, since you're (inaudible) for growth, you're not going to go that route. And third would be to reduce the share count somehow by some type of engineering. Or, I guess, fourth maybe be open to a merger or some type of reorganization where you would get more leverage into the model that way.

I really don't --

I mean I honestly, you know, we -- to tell you the truth, we're really focused very strongly on the business and the results more than the stock and, I think, the things we've invested in and we've put in place now and we will be doing in the future, will take care what has to get the stock up.

And to make another comment, the board has a -- at least addressed the last two that you mentioned and there is no appetite for that. You know, if you look back just two or three years ago, and I can't remember the exact timeframe, because I don't have it in front of me, but the stock was 4 1/4 no more than two years ago, which was roughly the same book as it is now, not much different. And it came back, and, of course, historically it's done that, and it's gone, of course, as high as 22. So I think that focusing on our business and getting back to a higher volume and better bottom line will, I think, care of the stock price.

Has the firm ever done a buyback in history?

No.

So, regardless of the price that's still not something you're going to -- .

Well, you can never say never, but right now, the board doesn't seem to have an appetite for that. Especially since you'd have to do it with borrowed money at this point. As I said, that's not being considered at this point.

Okay, and then lastly on looking out for the next quarter or two, it seems like some of the firms in the line card have talked a little bit about some seasonal pick up, some sequential strength. I know you're not giving guidance, but do you think you would expect to grow with the revenues that are coming out from the Xilinx and Linear, where recently seemed to have picked up -- business picked up a bit?

Yes. I definitely think, not only can we grow to that, but we were hoping that we could actually out-perform that growth to some degree. The activity has been good. Of course, we have the summer months coming, but our book-to-bill is positive and the activity level is pretty active right now.

It's Dave Bowers. I will add to that that. For a solid three years now, quarter-on-quarter, as an aggregate versus our suppliers, we have grown faster than them every quarter.

Correct.

So we're not going to stop that.

Great. Okay. Hopefully growth rates in the industry can pick up as well. Okay.

Thank you, Moving on, we'll hear from Mike Neary, Neary Asset Management.

As an investor, you mentioned you were looking at whether to take advantage of these opportunities or grow your margins, and as an investor, I think you should do both. So, does that cover everything?

Yes. We agree more.

I did have a couple of quick questions. CapEx for this year and next year, I know it's minimal. What's it going to be, a couple hundred thousand?

CapEx usually runs about a million.

About a million?.

Yes, usually. That's a lot of PCs and things like that and a lot of other -- .

Hardware.

Stuff that you need around the Company. But, no, it shouldn't be any more than that unless we made a major move warehousing-wise, which I don't believe is in the cards right now.

What was it this year?

Good question, because I don't have it -- just give me a second and I'll have it for you. It was $833,000 this year.

Okay. And option grants, wha, did you issue this year with your plans for next year?

51,000 options was all that was issued this year. Right now, there are not a lot of options available for grant.

Okay. Okay. Thanks.

You're welcome. Thank you.

[OPERATOR INSTRUCTIONS] Mr. Schuster, it appears there are no more questions, I would like to turn things back over to you for additional or closing remarks.

Okay, thank you. We look forward to your support and look forward to updating you in the future. Thank you, few -- thank you, again, for calling in.

I would like to remind everyone there will be a replay available today beginning at 6:45 eastern time, and will be available through May 18 by dialing 888-203-1112 or 719-457-0820, and using the pass code of 6990084. That does concludes today's conference call. Thank you full -- all for your participation and have a great day.