艾睿電子 (ARW) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Nu Horizons first-quarter fiscal year 2010 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 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, Senior Executive Vice President and Chief Operating Officer of Nu Horizons Electronics Corp. Please go ahead, sir.

Thank you. Good afternoon and welcome to the Nu Horizons first quarter of fiscal year 2010 conference call. I am Richard Schuster, Senior Executive Vice President and Chief Operating Officer of Nu Horizons Electronics Corp. With me here today are Arthur Nadata, Executive Chairman; Jim Estill, President and Chief Executive Officer; and Kurt Freudenberg, Executive Vice President and Chief Financial Officer.

Kurt will give an overview of the financial results for the first quarter of fiscal year 2010. 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 may have.

At this point, I would like to turn the call over to Kurt.

Thank you, Rich. Consolidated net sales for the first quarter of fiscal year 2010 are $147,759,000 compared to $200,152,000 in the comparable period last year. Sequential quarterly consolidated sales decreased only $3 million or 2% over the fourth quarter of fiscal 2009. Sales in our active global electronics components distribution segment were down $46.2 million or 24.9% for the first quarter of fiscal 2010 compared to the prior year.

Geographically, sales for Q1 of fiscal 2010 compared to the first quarter of the prior year were down 14.6% in Asia, 35.8% in North America and up 12.1% in Europe. Asia and North America's sales were impacted by the global economic recession and the continued transfer of business to Asia. Europe's growth is primarily related to our acquisition of C-88 in September 2008 and sales growth in Germany and Eastern Europe, although from a relatively low base.

Sales for our passive components segment in Q1 of fiscal 2010 were down 41.7% compared to Q1 of the prior year and sequentially down 13.9%, primarily due to the economic recession.

For the sales group, the first quarter continued to be a challenge as the market for the servers and storage continued to have low demand, and the replacement of business lost last year due to Sun's product line discontinuation remained difficult. Sales were down 50.6% from Q1 of fiscal 2009 and down 11.2% sequentially.

Gross margin increased year over year from 11.1% to 12.2%, but is lower than Q4 fiscal year 2009's 15%. The increased margin was due to a margin enhancement provided by our supplier, as well as value-added business provided by our integration center. The gross margin in Q4 of fiscal 2009 was enhanced by a higher-margin transaction that was not repeated in Q1 of 2010.

We continue to make substantial progress in growing our design win opportunities by offering OEM customers not only advanced technologies, but also engineering expertise to facilitate state-of-the-art design solutions. Design win revenue was $41.6 million compared to $44.2 million in the same period of the fiscal year 2009. Design win registrations were up 23.8% for the first quarter of fiscal 2010 compared to the prior-year period.

Our book-to-bill ratio was 1 to 1 in the first quarter of fiscal 2010 and has increased to 1.17 to 1 in June. The consolidated gross profit margin for the first quarter of fiscal 2010 was 14.2% as compared to 15.5% in the same period of the prior year. The lower gross margin for the first quarter of fiscal 2009 is attributable to an increase in lower-margin sales in the Asia-Pacific markets and a change in product mix to include a higher amount of lower-margin business in North America and Europe. In addition, reduced supplier discounts aggregating [to $235,000] and higher freighting costs also contributed to the decrease in profit margin during the quarter ended May 31, 2009.

Due to the current worldwide economic recession and related decreased product demand in fiscal 2009, the Company took cost reduction actions to reduce its cost of operations to adjust for lower product demand. The actions are estimated to result in $10 million to $12 million in reduced annual costs.

In the first quarter of fiscal 2010, a one-week furlough was implemented, which provided a one-time cost benefit of approximately $600,000. We will also implement a one-week furlough in the second quarter of fiscal 2010. Additionally, we expect to incur lower professional fees in 2010 due to the completion of the audit committee's investigation of the Vitesse matter and a continued focus on reducing all professional fees.

Selling, general and administrative expenses decreased $6,454,000 or 22.9% over the first quarter of fiscal 2009, primarily due to the following items -- one, a decrease of $5,344,000 in selling and administrative expenses primarily related to a reduction in workforce during the third and fourth quarters of fiscal 2009, a salary reduction program implemented in the fourth quarter of fiscal 2009, and a mandatory one-week furlough program invoked during the first quarter of 2010; two, a $700,000 decrease in travel and entertainment, primarily attributable to the decrease in salesforce as compared to the prior period; three, a decrease of $542,000 in outgoing freight expense, primarily attributable to a decrease in sales; and four, a decrease of $496,000 in professional fees.

These decreases were partially offset by increases of $523,000 for operating expenses related to our acquisition of C-88 in the third quarter of 2009.

Year over year, interest expense decreased 55% from $934,000 to $419,000. This is primarily due to lower average borrowings and lower average interest rates compared to the prior year.

The consolidated effective tax rate for the three months ended May 31, 2009, was 15% as compared to 31% for the three months ended May 31, 2008. The effective tax rate is lower than the statutory rate of 35% for the three months ended May 31, 2009, primarily due to foreign income tax earned at tax rates lower than the US tax rate, lower state and local income taxes, and a tax benefit resulting from a foreign tax credit, partially offset by an increase in the valuation allowance for certain foreign net operating losses.

The net loss for the first quarter of fiscal 2010 was $944,000 compared to net income of $1.1 million in the prior year. The loss of $0.05 compared to the diluted earnings per share of $0.06 per share in the first quarter of fiscal 2009. The decreased compared to the same period last year is primarily attributable to a decrease in sales and gross profit due to the current worldwide economic recession.

The Company has a strong balance sheet. In the first quarter of fiscal 2010, the Company generated $3,294,000 of cash from operations. Approximately $1,381,000 of debt was repaid. And at May 31, 2009, the Company had $146,839,000 of working capital.

For the quarter ended May 31, 2009, the inventory turns improved to 5.6 turns, while days sales outstanding were at 69.7 days. At May 31, 2009, total bank debt was down to $22,182,000, and the Company had $74.9 million cash available under all its bank facilities.

On July 6, 2009, as a result of active asset management of our accounts receivable, inventory and other working capital accounts, the Company had zero outstanding on its domestic revolving credit line. Additionally, today we have $4.3 million of excess cash being invested.

Now I will turn the call back over to Rich.

Thank you, Kurt. The first quarter of fiscal year 2010 performance reflects a general stabilization for the active components segment in all geographies with a 1-to-1 book-to-bill for the quarter, increasing to a 1.17-to-1 book-to-bill in June of 2009. We have continued to develop advanced technology customer training and education programs as a part of our XpressTrack hands-on lab and webinar initiative, application notes and LabCam video tutorials, and preferred engineering support for customer product development teams.

These efforts contributed to our continued success in increasing design activity and design revenue with design win revenue for the active components segment globally increasing 8.9%, the number of design wins increasing 18.2%, and registrations increasing 8.1% sequentially.

Finally, on the manufacturing and fulfillment side, we believe that OEM and EMS customers are beginning to increase material pipelines and forecast visibility as demand stabilizes and as leadtimes extend for many products.

In North America, topline revenue decreased 7.6% sequentially, although the book-to-bill was positive for the quarter and for the final month of the quarter. Design activity increased significantly, with registrations up 31% sequentially and design wins reversing last quarter's downward trend with a sequential increase of 14%.

On the fulfillment side, EMS providers in the Americas remain challenged as production continued to transition to low-cost global regions, although the rate of transition appears to have slowed in quarter one. Active segment customers in the Americas, which appear less impacted by the economic recession, included medical, military/aerospace, networking and industrial. OEMs in North America were a bright spot in both bookings and billings, with a 1.2-to-1 book-to-bill for quarter one.

In EMEA, topline revenue increased sequentially 2.5%, with the UK, the Nordic region and Germany finishing the quarter with a book-to-bill close to parity. Design activity in EMEA had significant sequential increase, with registrations up 20% and design wins up 48%. Growth in revenue and designs is attributable to investing in new markets for Nu Horizons, such as the industrial and medical sectors, as a strategy to drive revenue growth and customer base expansion.

All EMEA regions contributed positively to revenue growth in quarter one, with particularly significant growth in Central and Eastern Europe. The acquisition of C-88 in the Nordic region continued to provide increased activity levels for recently added Nu Horizons supplier partners, providing for both increased design registrations and increased revenue. After only six months of representing these suppliers in the Nordic region, the design funnel is greater than $10 million.

In APAC, topline revenue increased 13.2% sequentially, with the book-to-bill ending at approximately 1 to 1, with the final month of the quarter at 1.05 to 1. Design activity in APAC remains strong, with registration activity essentially flat gradually with quarter four year '09, both of which were record registration quarters. Design wins were up 24% sequentially.

Quarter one was an exciting quarter for APAC, with the introduction of a second line card, Origin Electronics, and the associated supplier franchise expansion supporting the second line card. Additionally, Electronics Supply & Manufacturing-China, ESMC Magazine, named Nu Horizons one of China's most preferred 2009 overseas distributors.

Along with record registration activity, quarter one represented record demand creation revenues for APAC, with the most significant growth coming from China and India. The global EMS segment and in particular the EMS providers in [Asia] continued to experience low demand in quarter one, although indigenous OEM customer development in all of APAC had more than offset the challenges in the global EMS segment.

The systems group is seeing signs of a recovery in quarter two of fiscal 2010. Bookings in June are the highest since June 2008 due to sales from new customers as well as rebound in orders from existing customers. The uncertainty surrounding Oracle's acquisition of Sun Microsystems has had a negative impact on new business pipeline development, but has not yet affected the existing account base.

Finally, in quarter one, we designed and shipped our first IBM orders for a significant Homeland Security company. We are gaining traction in other security, defense and airborne applications and expect to see growth in our IBM sector in the second half of the year.

Although we have seen stabilization in demand for many customer segments, the global market for both active components and systems remains a challenge. We will continue our aggressive sales effort such as our second line card in APAC; the targeting of demand creation components to vertical markets, such as medical, military, lighting, power management and energy alternatives; the expansion of what we sell to our customer base through solution selling and supplier partnerships; and the focus on bringing increased efficiencies to all aspects of our business for both demand creation and fulfillment. Design and value add continues to represent a higher percentage of our total revenue. We believe this demonstrates the value our model brings to our suppliers and our customers.

Our passive components subsidiary has seen improvement in bookings and quote activity in the last two months. Lower sales were somewhat offset by stable margins and continued cost-cutting initiatives. Sales in North America were particularly challenged due to lower distributor purchases and conservative buying from OEM customers. Recently, we see some replenishment of inventory as demand is gradually increasing.

European sales were down as well, but have leveled off recently. Asia was down to the lower volume of production from North American transfer business. Many passive component factories have cut capacity, and consequently leadtimes are increasing and some spot shortages have appeared. The equilibrium in supply and demand is close at hand, so we believe that prices will start to increase on a gradual basis. Sales of more critical components for telecom infrastructure, medical, security and even some consumer products have been improving.

Thank you, and now we would like to open the conference call to any questions you may have.

(Operator Instructions). Matt Sheerin, Thomas Weisel Partners.

So my first question, just regarding the book-to-bill, Rich, what was the -- you had mentioned book-to-bill by region. What was it in North America at the end of June?

Total book-to-bill?

Yes.

For all components, Matt, or are you talking passives?

No, for all components, for your actives business, the North America business?

We just said that was 1.17 --

It was 1.2 to 1.

1.2 to 1.

I thought you said just your OEM business was 1.2 to 1.

No, overall.

Overall, 1.2? Okay. Why do you think you have seen such a spike there?

This is Arthur, Matt. The activity level has picked up. And, like, we have seen some shortages going out a little bit. So prices have stabilized in a lot of areas, but just overall activity has picked up.

Okay. And where are you seeing shortages?

In some of the memory stuff.

Memory, okay. And then just on the gross margin, which was down, and you explained why, do you expect it to be in the low 14s for awhile until we start to see North America improve more significantly?

We do see it there, but we have put some programs within the Company to start to raise our margin in some of the demand creation areas and in some of the shortage areas. So we hope that will be on the lower end, if anything.

Okay. And are you seeing pricing pressure, meaning among other distributors just chasing business, because a lot of it is just turns business, because there is not a lot of backlog. Is that another reason for the margin pressure?

Yes. A lot of the business is not -- the demand is gradually increasing. But still, the bulk of the increase I would say is gaining share, is us taking share from -- in certain lines, particularly in North America and APAC.

Okay. And I know you don't give guidance, and I appreciate that, but do you think the May quarter might have marked the bottom here in terms of your revenue, where you're going to start seeing in the -- I mean, if you look at the book-to-bill, it sounds positive, but book-to-bill doesn't, if you look -- talk to other companies, it doesn't seem as meaningful now as it has been in past cycles, because the leadtimes are so short you don't really know if the orders are real or not. But do you think that this is sort of the bottom here for you?

Well, I think we have seen a little optimism. People have more confidence. As I said, the activity levels have picked up. And just basically speaking to the field and on a global basis, we have seen demand gradually begin to increase on some of those customers that have been pretty quiet.

Okay. And then on the cost side, Kurt, you went over the laundry list of things that you have cut. On an incremental basis, do you expect SG&A to go lower here, or are all those costs pretty much out of the business?

Most of the costs I mentioned to you are already out of the business going forward. But we have a continuing program to look at all the costs in the business and see if there's any other places for efficiency. So we may have some others in the future.

What were the professional fees in the quarter?

Professional fees were -- for Vitesse were around $490,000.

Okay, so that is another $0.5 million that can come out eventually?

Yes, that should be going down. And that was on the first quarter, because it kind of trails. So the investigation was over internally last quarter, but the bills kind of drip into the next quarter. So we should see it go down.

And interest costs as well, Matt, should, obviously, with zero debt in North America at this point, should go down as well.

Got you. Just a couple more questions, if I may. Just regarding your commentary, Rich, about the Sun business, where you said that some customer -- looking forward in terms of pipeline, there is some hesitance from customers because of the Oracle acquisition, but current customers, there hasn't been a distraction. Could you explain that? I am not sure if I understand that.

Yes. This is Arthur again, Matt. Current customers, we have had backlog. They continue to buy products they have been buying. But as far as on the design side and customers with kind of a wait and see what is going to happen with Sun going forward have, what we see, have kind of turned down their design activity.

Got you. So they've committed to what they have been working on, but going forward they're going to --

Correct, correct.

-- hesitate. Got it. Makes sense. Okay, that's it.

And this, just lastly, a question for Jim, and welcome to the electronics distribution industry. Jim, I guess my question for you is, you have only been at the Company for a month, and don't want to put you on the spot, but do you have any initial thoughts about the opportunities both for you and Nu Horizons going forward?

Well, thanks. I think that the Company has tremendous opportunity, or I would not have joined the Company in the first place. I clearly did enough due diligence before joining to make that decision. And my opinion has not changed since I joined the Company.

Okay. Thanks very much.

[Robert Lanine], private investor.

My question related to the book-to-bill, and you answered most of it in response to Matt's question. But one of the secrets of getting a good number is having a low denominator in the fraction, and the first month of a quarter can be a little bit low on shipments. Just qualitatively, is there anything like that creeping in to make this number look a little bit better than it actually is? In this environment, it looks almost too good to be true, and you know, the old adage. So any flavor you can give me on that I would appreciate.

The flavor I can give you is the number we gave is the number on the spot. As I said, the activity level has picked up. So, will that continue? Is it solid, continuing to grow? The feedback from a lot of our field is a lot of those customers that have not been buying are starting to buy again.

Inventories are relatively low, so we do see some replenishment, as well as utilization. So the signs are more positive than we have seen in quite some time. Whether or not it is sustainable we can't project, but it has been this way for a few -- couple of months now.

Yes, well, predictions are tough, especially about the future. I don't know if that is Yogi Berra or who, but that sounds pretty good. And I was particularly struck with the fact that you think it is more gaining share, because you do seem to be doing better than the market is, and it seems that quite likely that is for sustainable reasons. Thanks.

(Operator Instructions). Gentlemen, we appear to have no further questions.

Well, I would like to thank everybody for participating on this conference call. We welcome your questions and look forward to the next conference call. Thank you all very much, and have a good day.

That concludes today's conference. You may now disconnect.