艾默生電氣 (EMR) 2005 Q2 法說會逐字稿

Welcome to Artesyn Technologies, Inc. earnings release conference call.

As a reminder, today call is being recorded.

For opening remarks and introductions I'll now turn the call to Pamela Rembaum, Director of Investor relations Please go ahead.

Good morning and thank you for joining us for Artesyn's second quarter 2005 conference call.

On the call with me this morning is Gary Larsen, our interim Chief Financial Officer and Joe O'Donnell Artesyn's President and CEO.

A copy of this morning's press release announcing our second quarter results is currently available on the Press Release section of our web site at www.artesyn.com under Investor Relations.

Additionally, the Company filed the earnings release prior to this call on Form 8-K with the SEC.

This call is being web cast live over the Internet on our web site.

A replay will be available immediately following the call on our website, or by dialing 888-203-1112.

The dial up replay pass code is 7343549 and will be available through August 12.

Before we begin, I'd like to remind you that except for historical data, comments on today's call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements including projections as to revenues or earnings, and other statements relating to expected future performance by Artesyn involve certain risks and uncertainties and may cause actual results to differ materially from those discussed on this call.

While Artesyn may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to update even if our estimates change.

For a more detailed discussion on such risks and uncertainties, please refer to our filings with the SEC, including our 10-K filed on March 16, 2005.

Now I would like to turn the call over to Gary Larsen, for a discussion about the Company's second quarter financial results.

Thank you, Pam, and good morning.

Sales for the second quarter were $108.1 million, compared $105 million for the same quarter last year.

The Power Conversion segment recorded second quarter sales of $92.1 million, up $4.2 million or 4.7% from the second quarter of 2004, and up $10.9 million or 13.3% from Q1 2005.

During the second quarter, the Wireless Infrastructure Division and Distribution channel improved the Power Segment sales as a result of new programs being launched.

However, Server and Storage Division negatively impacted Power Segment sales due to weak customer demand and programs going end of life earlier than expected.

The Embedded System Segment had second quarter sales of $15.9 million, a decrease of $1.6 million, or 9%, from Q2 2004, and a decrease of $5.2 million or 25% from Q1 of this year.

Sales were impacted during the second quarter, primarily as a result of two large customers reducing demand due to carried delays of 3G rollouts in China and North America.

Orders in the quarter were 100 million, yielding a book to bill ratio of 0.93.

Backlog at the end of the quarter was 77.7 million, with approximately 91% or 70.7 million, scheduled for shipment in the third quarter.

Orders and the backlog were both impacted in the second quarter by the continuing trend towards shorter ordering lead times.

Gross margins of 24% in the second quarter were negatively impacted from the slower demand in the Embedded Systems Segment during Q2.

Net income for the second quarter was $75,000 and earnings per share was at break even.

Included in the net income for the second quarter of 2005, are $3.3 million of restructuring charges associated with a company-wide initiative to reduce operating expenses.

Net of tax benefits the restructuring charges incurred during the quarter totaled $2.7 million, or $0.07 per share.

Total restructuring charges for 2005 are estimated at 5 million including costs related to the this morning's announcement to close the manufacturing facility in Hungary.

Of the total 2005 restructuring charges, $3.7 million will be settled in cash and $1.3 million relates to asset impairments.

The Hungary factory closure is expected to generate a net 2 million to 3 million in cash in 2005, as proceeds from the sale of equipment and raw materials to our EMS partner exceed the closure costs.

Additionally, we'll be marketing the factory for sale, which has an appraised market value of 6 million.

Total operating expenses in the quarter were 24.4 million, or 22.5% of sales, approximately 2.3 million or 10% higher than OpEx last year.

The increase is a result of the restructuring charges mentioned above.

R&D expense for the quarter 11.1 million, or 10% of sales.

Net interest expense in Q2 was 1 million.

Due a lower net income threshold this quarter the [inaudible] accounting methodology for calculating diluted earnings per share is not applicable for Q2 EPS calculations.

The effective tax rate for the quarter was 86%, including the restructuring charges mentioned above.

Excluding the restructuring charges the effective tax rate was 27% for the second quarter.

For the second half of tax rate remains at 23% to 25%.

Now turning to the balance sheet.

We ended the quarter with 97.3 million in cash and short-term investments.

Days working capital at the end of the quarter increased to 53 days from 50 days last quarter and 44 days at the end of 2004.

The increase in working capital is mostly related to a higher accounts receivable balance of 70 million at the end of the quarter.

Day sales outstanding for the quarter were 58 days, or 10 days more than Q1.

The higher accounts receivable and DSO reflect a combination of factors, including longer terms granted to customers as a result of competitive pressures, a shift in sales toward wireless infrastructure customers, and timing issues.

We continue to remain focused on working capital management and expect to reduce our DSO by 4 days to 5 days in the third quarter.

Inventories decreased by 5.5 million from Q1, and inventory turns were 6.7 million, compared to 5.1million in Q1.

Capital expenditures for the quarter were $3.5 million.

Depreciation and Amortization was 5.5 million in Q2.

Finally, our factories are operating at approximately 78% capacity in Power Conversion, and 50% in the Embedded Systems business.

Thank you, and I'll now turn the call over to Joe for a business review.

Thank you, Gary.

Good morning.

I'd like to discuss three areas today.

First, our decision to close Hungary, Q2 results, and then, finally, an outlook for the balance of the year.

The call will then be open to a Q&A.

When we opened Hungary in 2001, the intention was to satisfy European customer demand with low-cost local manufacturing.

A number of market factors changed over the last two years that resulted in the decision to move production from our Hungarian facility to Celestica.

First, wireless OEMs requested that we move production closer to their end markets.

This would would have resulted in Hungary operating at 50% of capacity.

Second, unfavorable changes in exchange rates between the dollar and the huf resulted in significant margin pressure.

The huf went from 280 to the dollar in December of 2001 to 205 to the dollar in June of this year.

This caused a 37% negative impact on local costs.

Celestica was chosen as our intended EMS provider for the following reasons: First, it offers us the flexibility to source products from multiple locations, addressing our customers' desire to produce near their end markets.

Second, improved cash flow, as Gary said, beginning the second half of this year.

And third, as a result of sourcing products from a larger, fully utilized facility, benefiting from greater efficiencies, we believe 2006 operating income will increase over $6 million as a result of this decision.

We expect the transfer to be completed by year-end.

I will address the 2005 P&L impact of our restructuring decision in the second half outlook discussion.

I would now like to address Q2 results and their impact going forward.

Overall sales for the quarter was, as expected, $108 million.

However, the sales mix for the quarter was not , with embedded system business experiencing lower than anticipated revenues.

This business was negatively impacted when two large Embedded System customers pushed out several significant programs related to Operator 3G rollouts in China and North America.

Additionally, the server market continued to have slower growth in Power, While rectifier sales increased significantly.

The combined change in sales mix had a negative effect on gross margins, which were 24% for the quarter.

Market share.

While the results in parts of our business were disappointing this past year, we continue to believe that Artesyn is improving the market position in the Wireless sector, and are are optimistic about future growth.

In Q2, this sector represented 33% of revenue, a 5 percentage-point increase from the first quarter, primarily from new program launches related to rectifiers and amplifiers.

We would expect wireless to increase by a couple more percentage points by year-end.

The server and storage market sector represented 39% of our sales mix, down from 42% in the first quarter.

The decline is a consequence of wireless sales growing faster than server storage.

This shift in end market revenue is consistent with our strategy of moving more of our Power business into the higher-margin wireless sector.

The Distribution Channel is another area that will allow us to expand our customer base while realizing better margins.

In the second quarter, Distribution revenue was 18%.

Our year-end objective is 20%.

Second quarter program wins.

We are excited about our continued success in winning new program commitments with our customers.

History has shown program awards are a good measure of future growth.

For example, in 2004, 50% of revenue were from products two years old or less.

After six months, 2005 is proving to be a record year.

Year-to-date there have been 57 major program awards, with estimated lifetime revenues of $575 million.

Over $800 million of major program awards have been signed in the last three quarters.

To put this in perspective, for the full year in 2004, there were $690 million in major new program awards.

Artesyn has unquestionably established significant market momentum, and and without question, is gaining future market share.

Second half outlook.

We anticipate revenue in earnings to increase sequentially in both Q2 and Q3 -- I'm sorry -- Q3 and Q4.

When compared to the first half, sales should grow 8% to 10%.

A falloff in Embedded Systems revenue will be offset by improving Power sales.

Current expectation are that earnings in the second half will increase from $0.05 in the first half, to a range of $0.19 to $0.23 in the second.

This second half estimate includes $0.02 per share for nonrecurring restructuring charges, and approximately $0.03 per share for nonrecurring operating costs associated with the transfer of production from Hungary.

Without this $0.05 in nonrecurring costs the expected range for the second half would be $0.24 to $0.28 per share, compared to $0.12 per share in the first half.

I'd like to turn the call over to a question-and-answer session.

Thank you.

[Operator instructions] And we'll go first with an associate with Lehman Brothers.

Hi.

This is Hardik Doshi.

I just had a question regarding your guidance.

I mean, essentially, last quarter, I think you mentioned that the server and storage market was continuing to be weak.

So, I'm just wondering what exactly the further weakness is coming from?

It it primarily the wireless customers and the embedded systems business?

Or is it a combination of that with some additional other factors?

Okay.

Let me make sure I understand your question.

The last quarter we indicated that the server and storage was weaker relative to other sectors.

Are we seeing other sectors with weakness as well?

Is that a fair interpretation?

Yes.

I mean, essentially, what changed from last quarter?

I mean, you already expected the server market to be -- to continue to be weak.

So, what is the additional factors that lead you to lower guidance versus the last quarter?

Okay.

The -- the major contributor to that is the embedded computer business.

Where we've seen project pushouts -- it's still revenue but much less than had been anticipated -- for some 3G programs in China and one major project in North America.

It would be embedded in that wireless sector for 3G.

Okay.

And your expectation as far as the rectifier and amplifier business?

I mean, you expect a major ramp in the second half, you know, you talked to offset some the weakness?

Is that still --

Yes.

The rectifier and amplifier business is growing rapidly, And in -- will have a major positive effect on revenues over the rest of this year and next year.

All right.

And so there are -- just moving on to the next topic -- regarding Celestica , what kind of products are exactly being moved over and how much percent of the sales did you derive from Europe.

Can you give a little more clarity on that?

Okay.

The wireless sector with European customers is primarily what was built in Hungary.

There were other high-speed -- there were also some high-speed data applications, but primarily wireless.

The revenue stream out of Hungary was about $50 million.

So that's what will be shifted to Celestica.

Okay.

And just lastly, could you give your breakdown by end markets again?

I think I missed the percentages

Sure.

This is Gary.

The breakdown for Q2 was computing and storage was 39% of revenue, wireless 33%, telecom and networking 10%, and distribution and other 18%.

All right.

Thanks very much.

And we'll go next to Todd Cooper with Stephens and Company.

Joe, typically when we see a power supply company make the decision to outsource there are some benefits to gain but improved gross margin isn't one of these benefits.

Can you discuss the circumstances in Hungary that make you think margins will improve as a result of these actions?

It's pretty straightforward, Todd but I think it's a good question.

It's -- I had talked earlier about the exchange rate between the huf and the dollar, resulting in a roughly 37% negative impact to our cost structure in Hungary from what we anticipated back in 2001.

The difference here is primarily moving production to Romania.

So it's the difference in labor rate and overhead cost of a lower cost location versus what's become a higher-cost location.

It's pretty straightforward and that's why the margin impact is positive for us.

Okay.

And can you reconcile the strength that you're seeing with the rectifier business and the power supply side, versus the weakness in the pushout you're seeing on the embedded business side in the wireless sector?

Right.

It's very specific -- what we are impacted with -- on the embedded side.

It's a couple customers, literally.

With 3G projects that we're involved with, who had anticipated much higher revenue both this quarter and the next quarter than they're anticipating now.

So, for specific projects, it's two customers for particular applications in 3G, One in North America and then China.

The other in power is a much broader-based application, for example, we have rectifies certainly in 3G.

But also in edge and in GSM applications.

And then the same story would be for the amplifiers.

So there's certainly an ongoing revenue stream in embedded.

But it was the, you know, the improvement or the growth that we're is not going to see right now. for the reason I just described, out of China and one major North American program.

Okay.

And with the power supply business, what do you think the quarterly revenue break even level is now?

I know it's somewhat dependent on mix.

Can you give us an idea?

Well, it's something less than where we're operating today.

Gary will see if he can work on that while we're talking.

Because we were profitable, again, in the second quarter.

You were profitable on the power supply side?

Correct.

Excluding restructuring charges, Todd.

Okay.

Okay.

And, Joe, one last.

You previously announced that you were reviewing strategic alternatives for the business.

Anything to talk about regarding this initiative today?

There would be nothing new to talk about regarding that initiative.

Okay.

Thank you very much.

You're welcome.

We'll go next to Steve Smigie with Raymond James.

Great.

Thank you.

Just turning to your guidance again.

Could you give us some sense of what amount of growth you might expect sequentially to Q3 and how much you would get in Q4?

Like what the break up of that would be?

We actually didn't -- didn't provide it quarter-to-quarter, but as we indicated, the guidance is that sequentially it will increase through the balance of the year.

Okay.

And are you expecting much larger chunk in one quarter versus the other?

Well, with current forecasts, it would show that in consistent with the sequential guidance; it would show that the fourth quarter would be higher than the third quarter.

Okay.

And then in terms of gross margin, obviously to get to your EPS guidance, it seems you need some sort of gross margin improvement.

Is that what you're -- is that built into your guidance?

Yes.

Yes, it is.

We do expect -- we haven't provided the gross margin.

We haven't done that traditionally.

But we certainly anticipate gross margins to improve.

This is consistent with -- you know, you talked with us about this quite often.

It's consistent with our strategy of having invested heavily in rectifiers and amplifiers.

We're now experiencing a revenue from that on a ramping basis.

And that will have a positive margin impact for us.

Okay.

And could you just comment on what you're assumptions are about share count for Q3 and Q4?

Yes.

This is Gary. for Q3 and Q4, we are assuming that it will be over the threshold for using the data converter method.

So, that would be about 51.5 million shares for those quarters.

Okay.

And then, you need to add back the after-tax cost of interest on that converter and that's about 850,000 per quarter.

Okay.

Great.

Thank you.

[Operator instructions] We'll go next to Thomas Dinges with JP Morgan.

Hi, Joe, on the weakness in Server and Storage and just the acceleration of the end of life that you saw there.

Did you have any very late in the quarter shipments, where customers took a little bit more of this product as they accelerated the end of life?

And does that necessarily imply that you have a little weaker than expected seasonal quarter in this next quarter here?

And then I have a real quick follow-up for you.

Ok.

We saw a higher revenue in the third month of the quarter than the first two, which is typical.

Where we did have unusually heavy demand at the end of a quarter, was actually on the wireless side, versus the server and storage, which is -- if you did it on a weekly basis -- which was reasonably flat for the quarter, although, somewhat higher in the last month, which is always the case.

I certainly didn't sense any unusual demand to fill the pipeline for end of life in the first -- in the last quarter.

Okay.

And then finally, just a quick one on sort of the -- a couple of items in the body of the income statement.

You drove SG&A down a little bit and actually were a little lighter on the R&D side there.

What's sort of the expectation in that area for the second half of the year, given the modest uptick in revenue?

Do you feel like you've got the business in terms of sales people and those costs there are sized properly for the end of year, which means, you'll see some modest increase in SG&A line and in the R&D line, but not a whole lot, so you actually get some flow through then to position you well for '06 as well?

Yes.

I wouldn't expect that we would see an increase in the SG&A line through the balance of the year.

It's part of the cost reductions we've been going through.

The reductions, by the way, have been primarily -- although we don't break it out -- between S and G&A, and then primarily on the G&A side, versus the sales side.

But I would anticipate you would look at the same kind of run rate we just saw.

Okay.

Thank you.

If I could just go back to Todd's question before on the break even in Power.

That would be approximately 80 million in quarterly revenue, and that will obviously -- that break even point will decline post-Hungary closure.

And it appears we have no further questions at this time.

Ms. Rembaum, I'll turn it back over to you for any additional comments.

We would like to thank everybody for joining us for our call, and we look forward to you joining us for our third quarter call in October.

Thank you very much.

And this does conclude today's call.

We thank you for your participation.

You may now disconnect.