艾睿電子 (ARW) 2009 Q1 法說會逐字稿

Good day and welcome to the Nu Horizons first quarter fiscal year 2009 earnings conference call. Today's call is being recorded. For the purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, our statements today 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 management, including management's own assessment of Nu Horizons industry and competitive landscape. During the presentation, your line will be in a listen only mode. At its conclusion, there will be a question and answer session. Instructions on how to signal for a question will be given at that time. Now for opening remarks and introductions, I'd like to turn the conference over to Mr. Richard Schuster, President and Chief Operating Officer of Nu Horizons Electronics Corporation. Please go ahead.

Good afternoon and welcome to the Nu Horizons first quarter of fiscal year 2009 conference call. I am Richard Schuster, President and Chief Operating Officer of Nu Horizons Electronics Corp. With me here today are Arthur Nadata, Chairman and CEO, Kurt Freudenberg, Executive Vice President and Chief Financial Officer, and Dave Bowers, President of Nu Horizons Distribution Division. Kurt will give an overview of the financial results for the first quarter of fiscal year 2009. I will then provide a brief market overview, and synopsis of our company's performance, along with some comments on the industry in general. We will then respond to any questions you have. At this point, I'd like to turn the call over to Kurt.

Thank you, Rich and good afternoon, everyone. Net sales from continuing operations for the first quarter for 2009 increased to $200.152 million from $175.232 million in the comparable period last year, an increase of 14.2%. Sales in our core global electronics components distribution division were up $23.808 million or 14.7% for the first quarter of fiscal 2009 compared to the prior year. Geographically, sales from Q1 of fiscal '09 were up 63% in Asia, up 52% in Europe, and down 1% in North America when compared to the same period of the prior fiscal year. System sales increased 8.5% to $14.230 million for the first quarter of fiscal 2009. Sequential quarterly sales increased $6.469 million, or 3.3% over the fourth quarter of fiscal 2008.

Design win revenue increased 12.1% over the first quarter of the prior fiscal year to $44.234 million and the number of design registrations were up 65% for the same periods. The gross profit margin for the first quarter of fiscal '09 was 15.5% as compared to 16.9% in the same period of the prior year. The decline in gross margin resulted primarily from lower supplier discounts, increased freight costs, product mix, lower margins associated with increased order size, as well as increased sales in the Asia Pacific market, which require lower selling prices to secure higher volume business from large Asian contract manufacturers. As a percentage of sales, operating expenses decreased to 14.1% compared to 14.6% in the prior year. On a dollar basis, operating expenses for the current quarter ended May 31, 2008, increased $2.5 million to a total of $28.147 million compared to the prior year first quarter. This dollar increase in operating expenses was primarily related to the increased professional fees related to the SEC investigation entitled "In the matter of Vitesse semiconductor Corporation", and the related internal investigation being conducted by our Audit Committee and personnel related costs relating to increased staffing levels to support our start up operations in Germany.

Operating margins in our North American and Asian business have improved this quarter, when compared to the same quarter last year. While the European operating margins are down due primarily to our continued investment in Europe, primarily in Germany, as well as new sales agents in central and Eastern Europe, our results in Germany were on target for the first quarter. In connection with our ongoing focus to improve Operations and cost efficiencies, we plan to consolidate our Melville, New York warehouse into our expanding Mississippi warehouse, which we expect to yield an estimated annual savings of $1.1 million, starting in January 2009, excluding approximately $400,000 of one-time severance costs. As a percentage of sales for the first quarter of fiscal 2009, interest expense is flat when compared to the prior period. The consolidated tax rate for the three months ended May 31, 2008, is 31%, as compared to 41.3% for the three months ended May 31, 2007. The consolidated effective rate was higher in the first quarter of fiscal 2008 due to the penalties and interest associated with the '07 financial statement restatement. The fiscal '09 consolidated effective tax rate is lower than the United States statutory rates due primarily to lower foreign income tax rates resulting from our election to permanently reinvest foreign income in the operations of respective foreign countries. Net income for the first quarter decreased to $1.155 million, compared to $1.688 million in the prior year period.

Diluted earnings per share is $0.06 per share for the first quarter of fiscal 2009. The decrease compared to the same period of last year is primarily attributed to increased professional fees of $970,000, due to the Vitesse-related SEC inquiry and related internal investigation for the three months ended May 31, 2008, as well as personnel costs in Germany. On a pro forma basis, excluding professional fees mentioned above, diluted earnings per share would have been $0.10 for the first quarters of fiscal '09 and '08. Our balance sheet is strong and liquid with $208 million in working capital and our current ratio is 3.2 to 1 at May 31, 2008. Our Day Sales Outstanding were 68.7 and our inventory turned 5.85 times on average. At May 31, 2008, our outstanding debt was $75 million, and we had an aggregate of $56 million available on our bank credit lines. In the first quarter of fiscal '09, approximately $1.338 million of cash flow was generated by operations.

And now I'll turn the call back over to Rich.

Thank you, Kurt.

First quarter of fiscal year 2009 represented a significant improvement for us on several fronts. We continued to gain operating leverage in Asia Pacific, generating over 4% operating profit in our distribution business and the larger semiconductor consumption market in the world. Further, we gained ground in the United Kingdom with growth and improved profitability, and we substantially reduced our operating losses in Central Europe with a 9% improvement in top line revenues from our fiscal year 2008 quarter four. We did experience the effect of a market slowdown, which has begun in North America, experiencing flat sales in this key territory during the quarter, both versus last year quarter one and quarter four. During the quarter, we announced key supply to franchise extensions as both Linear Technology and Marvell began to extend our partnership to Europe. We engaged with Xylog, a leader in microcontroller technology throughout the Asia Pacific region, and in the Americas, we strengthened our solid state lighting initiative with the announcement of several new solution partners in this rapidly growing business.

Without a doubt, the most exciting news for us on an ongoing basis is the rapid growth and improved profitability of our Asia Pacific distribution operations. We recorded year-over-year same quarter revenue growth of 78% in quarter one fiscal 2009, coming on top of our 79% full year fiscal year 2008 growth versus fiscal year 2007. As we all know, China has become the largest market in the world in our industry, and we were excited to announce in just the past 30 days that we have been named for the third consecutive year as most preferred distributor in China by Electronic Supply and Manufacturing China Magazine. ESMC is the leading electronics industry publication in China.

In Europe, we grew 57% year-over-year, same quarter. We began to get traction in Germany and we expanded into the fast growing Eastern European market with new hires in Poland and Hungary. In particular, Linear Technologies and Marvell's moves to authorize us in Germany and Austria were major positive achievements for us, as our new suppliers have substantially strengthened our offering in the Central Europe market, one which accounts for nearly half of the semiconductor spend through distribution in all of Europe. We again achieved market share gains in North America, but saw this market begin to soften in the later part of quarter one. We reduced our operating cost in the Americas in December 2007, and this helped us to offset flat sales and reduce gross margin results through the quarter one period. While we remain strongly committed to the North American market, and continue to invest here, we see the trend to outsourcing as a steady shift. Also during the quarter, we began to see improvement in our systems distribution business.

Revenue in quarter one was up 16% from the previous quarter, and up 8.5% over quarter one over a year ago due to the acquisition of several significant new customers and growth in our core Sun Microsystems market. Gross profits grew even more dramatically with gains of 24% over the previous quarter, and 50% over Quarter One a year ago. This improvement was due to a better mix of value-oriented customers, an increase in integration services, and a renewed emphasis on driving higher margin programs. Our passive components business was a positive contributor to gross margins, and while top sales lines were relatively flat, gross profit percentages did increase.

Thank you, and now I'd like to open the conference call to any questions you may have.

Thank you. (OPERATOR INSTRUCTIONS). We'll pause for just a moment. We'll take our first question from Matt Sheerin from Thomas Weisel Partners.

Thanks. Just one of the questions regarding the demand picture, you said things in North America at the end of the first quarter started to slow a little bit. Here you are half way through almost the second fiscal quarter. Are things getting worse in North America or are they stable?

Matt, it's Dave Bowers.

Hi, Dave.

Hi. We're on track with our plans through the first part of this quarter, so that's positive. We're a little concerned about the summer months, about the latter part of July and August, so, so far so good.

Is that, and what's the book-to-bill at right now?

Parity.

Okay. And is that the same thing in Europe and then in Asia or is it higher in those areas?

It's a little better in both Asia and it would be the highest, but still under 1.1.

Okay. And then Rich, on the passive business, on NIC, sounds like margins are up, but business is still flat. Is that just a mix issue?

Yes. It's basically a mix issue, we're selling more of our specialty high technology components, but the sales environment is still very challenging globally, actually.

And are you seeing in some of the more commodity areas that you play, are you seeing pricing competition and is it getting, has it been getting any worse over the last few months?

I have to say that while there's still some heavy competition in Asia, pricing for even the commodity products has started to stabilize with raw material costs and transportation costs going up, so the erosion I see has slowed down, but still relatively competitive in the Asian market.

Okay. And then regarding the warehouse consolidation, you said it's $1 million or so kicking in at the beginning of 2009. When is that actually going to take place, the transfer of the inventory?

It will start in January of 2009, that's when we expect to be shipping out of that warehouse.

And how many jobs will you eliminate?

I don't know the number of heads but I can tell you the severance is about $400,000.

And is that Long Island?

The heads is probably around 20. That's an estimate.

Okay, and will there be any, since you have all of the inventory under one roof, will there be any opportunities to keep inventory turns maybe at a faster rate or inventory days lower as a result or no?

We hope so. Yes.

Okay. And then regarding the legal fees that's related to that Vitesse investigation, could you give us the exact number and what do you expect it to be this quarter or next couple quarters or can you tell?

It was $970,000 for this past quarter and we expect it to be the same going forward for at least the next quarter going forward.

And do you have any visibility into when this thing is going to go away and will you know when it goes? Is someone going to tell you?

Unfortunately, we don't know that. We've not been communicating nor do we at this point expect that we will be communicated to by the SEC. It will be over when they stop asking questions.

Is that what your attorneys are telling you?

Right now, that's the best information we have.

Okay, but do you have any, is there anything to suggest that there's going to be any issues in terms of things that you produce so far that there could be issues or problems as with for Nu Horizons as a result of this investigation?

I'm not aware of anything.

(OPERATOR INSTRUCTIONS). Next we'll go to Mike Nery from Nery Asset Management.

Hi, just a couple questions. Can you give a little more history on the Vitesse investigation, when exactly did it start and just kind of overview that for me, please.

I don't have the exact data in front of me, but it's been a little over a year ago, and we have been asked to produce information related to any transactions with Vitesse by the SEC, and that's it. So we've been producing anything asked for related to that. To the SEC, for their investigation of Vitesse.

And except for responding to their request is your internal investigation of that over?

It's ongoing.

Okay. And you mentioned that it would be continuing in this next quarter and you don't have any visibility past that?

Right. Because we don't know, how many more requests may come up or questions on data already provided may continue.

Okay and you mentioned you're moving the warehouse to Mississippi. Is HQ going to stay where it is or what's happening with that?

It is. The headquarters will stay here and just the warehouse is moving to consolidate to make it more efficient.

Okay. And just a question, CapEx, depreciation, what was it for the quarter and then what's your outlook for the year?

Depreciation runs about $250,000 a quarter to $300,000. And I don't expect that's going to change.

Yes.

And CapEx for the quarter was around $475,000.

Okay. And just a general, bigger picture question, our stock is roughly $5, our tangible book is $8, every acquisition you guys have made has been more than tangible book. Every acquisition everyone else has made is over tangible book. What steps have you guys taken other than working on the operations to try to improve the stock price? Or improve the value to shareholders?

I mean, that's a very good question, and we have been doing everything we can from an operations standpoint to build the business, expand the top line to be more efficient in terms of our cost and margins and to bring more returns to the shareholder, increase the bottom line. The warehouse is a good example of that.

Okay, and other than operations, have you taken any steps in that regard?

What are you thinking of?

Well, you could buyback stock. You could buy stock personally. You could evaluate whether it would be better to sell the Company as opposed to staying independent. There's all kinds of things you could look at.

The stock buyback, the Board actually in its recent meeting did consider that and we determined that in the current environment that the use of cash would be best suited for expanding the business itself.

And did you look at any of the other options?

At this point in time, we're not aware of any other acquisitions in the horizon as far as anyone acquiring us, so obviously we have a fiduciary responsibility to look at anything that comes our way.

Okay, but you haven't taken any steps to actively shop the Company or anything like that?

We have not.

Okay. All right, thank you very much.

You're welcome.

Next we'll go to Russ Silvestri with SKIRITAI Capital.

Hello, Arthur, it's been awhile.

Yes.

I had a question in terms of inventories. It looks like your inventory growth on a year-over-year basis is a little bit less than the sales growth and I was wondering within the quarter, were there any reserves taken in inventories and just looking at the inventory in general, risk obsolescence is my question.

This is Kurt again. Inventory in terms of reserves -- our inventory looks, I think, super. The inventory turns are up. Reserves have remained consistent. We haven't had to use any reserves, so from an inventory standpoint, it's really only building to service the amount of sales we're doing.

Okay. Can you just remind me what the, I don't have the K in front of me but your inventory reserves at the end of last year were?

Yeah. Give me one second.

Thank you.

I'll give you the exact number. Inventory reserves were around $3.5 million at the end of the period, and it hasn't changed.

Okay.

But we do a quarterly review in terms of analyzing that number to make sure that the inventory is at fair value.

Okay, thank you.

You're welcome.

No more questions at this time, however as a final reminder (OPERATOR INSTRUCTIONS).

I would like to mention that some of you already are aware, we have recently retained Connie Chandler, who is principal of IR Strategies to work with Nu Horizons in our Investor Relations. We believe Investor Relations is important and Connie will be working with Management going forward as we continue our dialogue with the investment community. We'll be posting contact information for her on the next couple of days on our website. With that, I would like to thank everyone for participating on this conference call. We welcome your questions and look forward to the next conference call. Thank you, and have a good day.

And Ladies and Gentlemen, there will be a replay of today s conference available today, beginning at 7:15 p.m. Eastern time, and will be available through July 16. by dialing 1-888-203-1112 or 719-457-0820, and using passcode 8845545. Again, ladies and gentlemen, that will conclude today's presentation. Thank you for joining and have a wonderful day.