安森美 (ON) 2002 Q4 法說會逐字稿

Good afternoon and thank you all for holding.

I'd like to remind all parties that your lines have been placed on a listen-only mode until the question-and-answer session.

The conference is being recorded, if you have any objections.

I would now like to welcome you to the ON Semiconductor fourth quarter 2002 earnings release conference call.

I'd now like to turn the call over to Mr. Scott Sullinger.

Thank you sir, you may begin.

Thank you Holly (ph) .

Good afternoon and thanks for joining ON Semiconductor's fourth quarter 2002 conference call.

I'm Scott Sullinger, Director of Investor Relations at ON Semiconductor.

I'm joined today by Keith Jackson, our CEO;

John Kurtzweil, our CFO;

Bill Bradford, our Senior Vice-President of Sales and Marketing; and Bill George, our Senior Vice-President of Operations.

This call is being simultaneously Webcast on the investor relation's section of our Web site at www.onsemi.com.

And the Webcast will be available on our Web site for 30 days.

Now we'd like to highlight our upcoming event calendar.

We will be presenting at the Credit Suisse First Boston Fixed Income Technology Conference on February 11th; the Morgan Stanley Semiconductor and Systems Conference on March 4th; and the Lehman Brothers High Yield Conference on March 19th.

During the course of this conference call, we will make projections or other forward-looking statements regarding future events for the further financial performance of the company.

The words estimate, intend, expect, plan, or similar expressions are intended to identify forward-looking statements.

We wish to caution that such statements are subject to risks and uncertainties that could caution actual events or results to differ materially.

Important factors relating to our business including factors that could cause actual results to differ from our forward-looking statements are described in our Form 10-K and other filings with the SEC.

The company assumes no obligation to update forward-looking statements to reflect actual results or changed assumptions or other factors.

Now let's hear from our CEO, Keith Jackson, who will provide an overview of the fourth quarter.

Keith?

Thanks Scott, and thanks everyone joining us today.

Because of stronger than expected turns business during the fourth quarter, our revenues and gross margins for the quarter were better than the guidance that was provided in October.

The fourth quarter provided us with a challenge of a slightly down market, increased pricing pressure and compressed lead times.

We continue to drive costs down to help offset the impact of price erosion and during 2002, we completed actions to achieve an estimated 365 million in annual cost savings as compared to our cost structure during the first quarter of 2001.

We also have several programs underway to further reduce costs by moving certain administrative functions offshore and decommissioning older manufacturing lines.

Now let's talk about revenues.

Total revenues in the fourth quarter were 266 million a decrease of six million or two percent from the third quarter of 2002 and a decrease of one million or one-half of one percent from the fourth quarter of 2001.

From a market segment perspective, this decline in revenues was spread over most of our business.

With the exception of the networking business, which was up slightly, each of our end markets were down slightly.

The bigger story with our revenues is a continued shift in revenues by geographic region to reflect the increasing importance of the Asia Pacific region, particularly China.

From the fourth quarter of 2001 to the fourth quarter of 2002, Asia Pacific revenues, excluding Japan increased from 36 percent of revenues to 40 percent of revenues.

During this period, Europe remained flat at 20 percent of revenues.

Japan increased from six percent to seven percent of revenues and the Americas declined from 38 percent to 33 percent of revenues.

Going forward we expect that revenues from the Asia Pacific region will continue to represent an ever-larger percentage of our overall sales.

Looking across the channels, distribution accounted for 42 percent of our revenues.

Direct sales to OEMs accounted for 48 percent and the m s (ph) channel accounted for 10%.

During fourth quarter, we were one of 7 companies to earn Flextronics (ph) 2002 supplier performance award.

We are proud of this honor and plan to build on this accomplishment as part of our customer focused approach to doing business.

Let's now review some of our new product opportunities.

Our emphasis on new products was a contributing factor in growing our margins from 13.8% in fourth quarter of 2001 to 27.6% in the fourth quarter of 2002.

Last year, our design team in Toulouse, France completed the platform for our power management ASICs, our most sophisticated products to date.

These products enable our customers to design and going to market highly differentiated cell phones and PDAs.

We plan to follow this successful launch with the introduction of our first trench technology MOSFETs in Q1, 2003.

Preliminary results show that these products have best in class on resistance characteristics that will enable the extension of battery life in wireless devices.

Our new trench products are also expected to deliver leading edge performance for many computing and automotive applications.

Manufacturers of portable and wireless devices continue to design our products into their latest cell phones and PDAs.

For instance, our white LED drivers are now going latest hide in (ph) from Motorola.

A large Chinese cell phone manufacturer selected our NCP 1200 and UT Starcom in Japan is using our NCP1800 for its latest products.

We maintain our design activity in Asia with several notable wins, particular in the consumer space where manufacturers selected our power management devices to drive their popular consumer products.

Despite the challenging telecommunications and networking markets, we continue to position ourselves for growth when those markets turn.

Our power management devices are going into some of the latest d s l technology modems within industry analyst estimating strong global growth for that market.

In the fourth quarter of 2002, manufactures of communication gear and automated testing equipment designed our high frequency products into 102 sockets and more than 35 new programs.

Looking forward, we are going to build our new product efforts to continue our drive towards increased cash flow, market share growth an increased margins.

New I'd like to highlight some of our progress in the world's fastest growing market, China.

Continuing our success in this country, we began construction of our 6 inch wafer fab at the site of our joint venture in la shawn, cease 1 province (ph) .

During 2003, we plan to spend approximately 5 million dollars to complete the shell of the building and we are on track to complete the shell before the end of the third quarter of 2003.

Later in the year, we expect to finalize our timetable for the equipment purchases and other capital expenditures required to bring the facility to production ready status.

With our completion of the la shawn (ph) fab, well have a complete semiconductor enterprise within China, from design and manufacturing to sales and marketing.

Last year we experienced 23% revenue growth in China as many manufacturers in this fast growing market selected our products to meet their design needs.

This keeps us on track with our original 5 year plan for capitalizing on the China opportunity.

Now let's shift focus back to our backlog.

As far as near term backlog is concerned, at the beginning of the first quarter, our 13 week backlog on a sell in basis was 211 million dollars, which was 16 million or 7% less than the same index at the beginning of the fourth quarter.

We are once again operating in a short lead time environment where product availability is key.

Lead times of only a few weeks are common.

For the first quarter of 2003 we expect greater turns of business than the fourth quarter of 2002.

So far, through the end of January, distribution resale has been strong and our book to bill was greater than one.

Now, I'd like to turn it over to John for review of our financial performance, John?

Thank you, Keith.

A breakdown of our fourth quarter revenues of 266 million by product family is as follows: power management and standard analog revenues were down four percent sequentially to $89 million;

MOS power revenues were down by two percent sequentially to 34 million; standard component revenues were down one percent sequentially to 126 million; high frequency, or ECL revenues were flat at 17 million in the quarter.

On a mix-adjusted basis, ASPs were down 2.5 percent quarter-over-quarter.

The gross margin declined by 110 basis pointes sequentially to 27.6 percent, primarily as a result of pricing pressure.

However, on a year-over-year basis, our margin has increased dramatically in the 13.8 percent gross margins experienced during the fourth quarter of 2001.

In the fourth quarter of 2002, the Company announced a new cost reduction initiative that is expected to reduce costs by $80 million in 2003 and achieve an estimated 125 million in annualized cost savings by the end of the year, both as compared to the Company's annualized costs for the third quarter of 2002.

This cost reduction initiative in the Company taking--resulted in the Company taking a net 12.6 million of restructuring and other charges in the fourth quarter of 2002 associated with the worldwide workforce reduction and other cost reduction actions.

The Company also recognized 4.9 million of other severance related charges in the quarter, including 2.9 million of non-cash compensation charges.

The Company expects to fund the majority of the cash component of these charges in the first and second quarter of 2003.

The Company reported a net loss of 42 million in the fourth quarter of 2002, which included 17.5 million of restructuring and other charges, as compared to a net loss of 23 million in the third quarter of 2002.

On a per share basis, the Company reported a loss of 24 cents per share, which included ten cents per share of restructuring and other charges, as compared to a loss of 13 cents per share in the third quarter of 2002.

The Company also reported an income tax benefit of 1.2 million in the fourth quarter, compared to an income tax provision of 3 million for the third quarter.

Excluding the unexpected tax credits on a two cents per share and the restructuring and other charges of ten cents per share, the Company's loss per share in the fourth quarter of 2002 would have been 16 cents per share, as compared to a consensus analyst estimate of 17 cents loss per share.

Adjusted EBITDA for the fourth quarter 2002 was 47.5 million and adjusted EBITDA for 2002 was 179.5 million, compared to adjusted EBITDA for the fourth quarter of 2001 of 10.8 million and for 2001 of 75.2 million.

Our reconciliation of this non-GAAP financial measure to the U.S.

GAAP net income or loss is set out in the adjusted EBITDA reconciliation attached to our earnings release.

Cash and cash equivalents increased 2 million sequentially to 182 million as a result of better working capital management.

This represents the third quarter in a row that we have improved our cash position.

Inventory was held flat from last quarter at 160 million, or 75 days on a cost basis.

Distributor inventory declined slightly in the fourth quarter and remained in the 14 to 15 weeks of sales range.

Capital expenditures during the quarter were 2.5 million.

In summary, our fourth quarter was better than expected, considering the current environment.

We're pleased with the focus of our entire organization, on our aggressive cost-reduction plan, and our new product development efforts.

Regarding our first quarter outlook, we anticipate that total revenues will be flat to down four percent.

This is based on an opening backlog for the quarter of $211 million on a sell-in (ph) basis, or approximately 79 to 83 percent of this revenue guidance, and the expectation of increased turns business during the quarter.

For gross margin, our guidance is a decrease of 200 to 300 basis points.

We expect that our cash balance will decline by 20 to 25 million in the first quarter of 2003, primarily resulting from 27 million of a one-time, planned, supplemental interest payment related to our bank debt, which we would most likely pay in March of 2003.

Now, for some guidance on the year, 2003.

We renegotiated a pricing contract in the fourth quarter, and as a result, we expect that pricing will continue to decline during the first half of 2003, with price declines expected to level off towards the end of the year.

During 2003, we expect that our sturbed (ph) Addressable market will grow by four to five percent on a dollar basis.

We expect that our gross margins should exceed 30 percent per quarter by the end of the year, and our R&D expenses should be approximately six percent of revenues.

Our sales and marketing expenses should be approximately five percent of revenues, and G&A expenses should sequentially decline, and so these expenses reach approximately six percent in the fourth quarter of 2003.

We expect to record a tax provision of three million per quarter in 2003, as well.

For 2003, we expect capital expenditures to be in the range of 50 to 60 million, including approximately five million to be -- five million to complete the building shell for our Leshan staff (ph) .

Furthermore, we continue to expect to have positive EPS in the fourth quarter of 2003.

With that, I would like to turn it back over to Keith to wrap up and lead us into the Q&A.

Keith?

Thanks, John.

In summary, we have created a much more efficient manufacturing structure though our cost reduction efforts.

Our R&D investments generated design wins and increased sales of new products during the years, and we're continuing to make progress with our China strategy.

We're confident with our continued focus on the business basics and leveraging the strength of our new products, we can successfully grow the company.

Thank you, and Holly (ph) , please open the lines for questions.

Sir, would you like to take questions at this time?

We're ready.

Thank you.

If you would like to ask a question, please press star, one on your touchtone phone.

All questions will be taken in the order they are received.

Once again, if you do have a question, please press star, one.

Our first question comes from Jonathan Joseph.

You may ask your question and please state your company name.

Salomon Smith Barney.

I wanted to ask you, with regard to China, John, is your outlook for growth in China about in line with your outlook for your total served market growth?

And then, with regard to business in China, do you find that there's a big buffer or distributors that may create less visibility, greater volatility?

Or, do you think that you have good visibility into the China market in inventories and demand et cetera?

OK, hi, this is Bill Bradford, I'll take the question.

In terms of your first question, our expectation is our growth will equate to our China SAM (ph) growth.

Because of the difficulty in getting granular data from WSDS (ph) or other sources, it gets more difficult to understand the specific SAM (ph) data in China.

But we expect our growth to mirror really the semi-conductor TAM (ph) growth and our SAM (ph) growth in China for the year.

And yes, I will concur with your comment about the problematic aspect of distribution in China, and because of the network being less mature, less established, it causes greater problems in terms of our visibility.

We do see more, what we call pass-through business to our distributors, we don't have as much inventory build up in the majority of our indigenous distributors, but really stock just enough product for specific customer needs that tend to pass through pretty rapidly.

So, with a much higher terms.

OK, thank you.

Mark Edelstone, you may ask your question and please state your company name.

Good afternoon guys.

It's Morgan Stanley.

Had a few questions if I could.

One is related, Keith, to the change in pricing that you have here for the year 2003.

If you could just kind of walk us through based on the contracts that you signed in the fourth quarter, give a sense to what kind of relative price declines you're expecting as we go through the year?

Mark, this is Bill Bradford again.

I'll take this one.

As expected this year, or in the first quarter, we're seeing ASP declines on a mix adjusted basis in the four-and-a-half percent range right now, and that is a result of a high percentage of our business being on annual contracts that were negotiated in the fourth quarter.

As John mentioned earlier, we would expect that pressure to continue through the first half of the year, but not as severe, because many of the contracts are negotiated annually and we do expect some leveling in the second half of the year on those ASPs.

But you'd expect them to head lower still in Q2?

Yes, but not as dramatic as Q1.

I'd say more typical, we had a two percent, two-and-a-half percent decline in Q4.

I would say we're projecting more in that range after the second quarter?

The other question I had was really related to the interaction between ASPs and gross margins, and probably for you John.

In the fourth quarter, the ASP erosion that you saw doesn't seem all that severe and given some of the restructuring efforts that are already underway, I guess I was a little bit surprised that we'd have gross margin degradation in Q4 on what seems like a relatively nominal change in ASPs.

Can you just kind of walk through that a little bit and maybe just help us understand the interaction there.

Sure.

In Q4 the gross margins were down.

ASPs were down by two-and-a-half percent.

The reason why gross margins aren't down by that same amount is you know, better utilization of our factories in total on the products that we're building and you know, Bill has put in a lot of restructuring over the last you know, year-and-a-half, to help drive costs up, to help compensate for that.

So you know, I was actually expecting worse gross margins, but the costs actually came in better than we expected.

So that's ...

OK, yes, I guess I was actually just thinking that maybe gross margins would have held up a little better with that kind of price degradation.

Maybe you could just give us a sense of when you kind of look at your business overall, and look at learning curve issues, what type of price erosion you think you can actually see in the business over time without gross margin degradation?

END &&&&& 20 here &&&& unid: ... products with respect to new product development?

This is Keith Jackson.

Certainly the trench technology is appropriate for the low voltage side and we will continue to develop there.

It does not indicate that we've ceased our work in the planer side.

OK.

Thanks, guys.

Jeff Harlaby (ph) , you may ask your question and please state your company name.

John, can you talk a little bit about the roll-through of the cost savings in '03 by quarter and also how the split is between SG&A and cost of goods sold?

OK.

On the $80 million that we're going to see, the majority of that is in cost of goods sold and we have the actions that are in place.

It's not all going to hit in the first half, the majority of it's going to hit in the second half that's related to those functions.

So that's just primarily where it's going to end up.

Bill, do you have any other comments you want to say in that?

OK.

And is any capacity being taken now, manufacturing capacity, or is more a shift to low cost location?

The only significant capacity being taken off-stream is an old four inch line in Isey (ph) Japan where we moved all the products into the six inch line.

OK.

And just looking at new product revenues, do you have a percentage on new product revenues in the quarter?

And also, if you can comment on kind of the new product engines for '03 and, you know, Keith, if you've seen any major changes in terms of the whole process and the products you'll be focusing on?

OK, I'll answer both those questions.

To the first one, we have historically released the information on our new product sales on a sell-in basis.

Based on regulation changes recently, we're not sure that's appropriate so we're busy recalculating those and coming out with new base lines historically.

So I'm going to have to defer that question for now, but we'll follow up at a later time.

Relative to the engines, clearly the trend towards more volume in portable units is a trend we expect to continue to see growth and even acceleration.

So therefore, all of the low power type of products that we have, power management types of products that we have, et cetera, are what we expect to bring most of the growth going into next year.

OK.

And then just on distributor inventories, do you see the sell-in and sell-through being comparable or do you think distributors still need to reduce their inventories?

Looks like they've kind of been stable at recent rates.

Yes, we've--we actually feel our inventories are very healthy now and would expect no sell-through adjustment at this point in the quarter.

We think the inventories are very healthy in the channel for us.

OK.

And last thing, just a comment on what you're seeing in terms of near-term market demand by end market?

As mentioned earlier, in terms of kind of our outlook for '03, we're seeing a pretty uniform demand by market segment.

No standout market segments with the exception of the--from a channel perspective.

Seeing relative strength right now in the distribution channel, which offset supports have a broad--a broad strength of our revenues.

So, you know, again we're seeing strength in consumer cell phones, PCs, not--strength might be too strong of a word, but we're seeing those markets hold and, you know, intense cost pressure from those manufacturers, but the units are pretty steady for us right now.

OK.

Thank you.

David Fitz (ph) , you may ask your question and please state your company name.

JP Morgan Securities.

Thank you.

Most of my questions have been answered, I just want to talk to a few things here.

On the G&A, you've got a pretty aggressive ramp-down as a percentage of sales through the year, and I'm just trying to figure out how that's gonna roll in through the year.

Are there more actions you're gonna take in the first and second quarters?

Or, are things in place that will bring some of those costs down?

And then, kind of a target for inventory turns as you go through the year -- are you where you want to be on the working capital metrics, specifically; the inventory, the receivables, and the payables?

And then finally, just on a seasonal factor, you sometimes have some pretty good second quarters because of some of your in markets, particularly the automobiles.

And how would you see that playing out this year?

I'll take the first question, and then I'll turn it over to Bill for the next one.

As far as the G&A, it'll be a pretty linear ramp going down throughout the year.

What we're doing is we're moving, you know, some of the functions that we have in the U.S. -- we've moved them offshore.

And they're all planned and communicated to the staff, both in the G&A section, as well as in the IT section.

So, you know, we're gonna be doing those in a very systematic and controlled fashion, so it's not gonna be a one-time big burst.

So, I would take it down on average over the year.

And then, let me turn it over to Bill for the inventory.

Yeah.

From an inventory standpoint, we think that the -- our plan at this point is the dollar value of inventory is gonna stay pretty constant through the year.

But, as the revenue grows, the turns will be going up somewhat, and the days of sales will be coming down some in that probably 10 percent or so.

Payables and receivables, John?

Did you ask a question, or you want to comment on that?

I mean, one comment I will make on payables -- there's a few regions of the world where we've had some significant opportunity where we're making some more progress in terms of payables.

And we'll be focusing on those specific opportunities in the near-term.

Yeah, in terms of your questions around the seasonality of the second quarter, I can comment on the fact that I think our end markets and key customers in general, our expectation is for increased demand in the second quarter.

So, right now it looks like it will be a healthy and growth quarter in the second quarter.

But, again, we're in a very, very short visibility period with short lead time, so it's hard to comment much more than that.

Fair enough.

And then, there's two small follow-ups.

Any currency impacts or hedging or things like that?

And then, cash cost -- your estimated cash costs for restructuring that are remaining through 2003?

And that's all.

Thank you.

OK.

Let me answer the last one first, is that the restructuring right now -- we have $21 million still on the books in terms of total restructuring.

The majority of that will play out in the first half of the year.

So, I think that's on track.

And then, as far as the currency and hedging, you know what we're seeing is we're seeing a pretty equal offset, you know, especially with the E.U., versus where we're building and where our contracts are in.

So, we don't expect to have much impact there, and we are hedging our exposure to the foreign currencies globally.

Thank you.

Joseph Von Meistri (ph) , you may ask your question and please state your company name.

This is Jefferies & Company.

I had a couple of brief follow-ups.

To go back to that restructuring cost question -- so the cash-out -- the unusual cash-out of first half will be cash restructuring costs of 23 million paid out, and then the 27 million of interest that you expect to pay at the end of the first quarter.

Is that correct?

At the end of the first quarter, the two main cash events, like you said, are gonna be the one-time supplemental interest on the current bank agreement that we have that we got a waiver for in September of 2001.

That's due.

And then the other one is the restructuring.

Most of it's gonna be paid out.

I'd say it'd be pretty equal between Q1 and Q2 with maybe 20, 25 percent of that falling, you know, into the second half of the year.

OK, so 75 percent in the first half.

Yes.

And what kind of availability, if any, did you have on your credit facility at the end of the quarter.

At the end of the quarter, we have about 12, $13 million available.

And can you give us income on a segment, operating income on a segment basis.

You gave us revenues for power management moss, high frequency and standard components.

You guys, I'm sorry, you don't pass that out.

Yes, we don't pass that out.

OK, that's it for me.

Thanks a lot.

OK, great, thank you very much.

Eric Ruble (ph) , you may ask your question and please state your company name.

Lon Tayback Roberts.

Guys, most of my questions have been answered here gentlemen.

Keith, you come to the company with vast experience in building and analog power management group.

I wanted to ask you if you could tell us, you know, where you see the company right now and where you see the biggest opportunities for the application of the new trench, low-power moss fits from the portable devices into auto and you know, in the computer if it's the new centrinal (ph) platform or mobile T4?

Thanks.

Yes, OK, kind of two things there.

First of all, opportunities for us, with the new technology, is not just in trench, but with our new analog products as well.

Have us with significant opportunities in the cell phone and PDAs where we do expect to have substantial growth in market share here the first half of the year.

And relative to planer versus trench (ph) on the computing side, there's still a place for both, very cost competitive and only the portable side of it having significant premiums to be had for the newer technologies.

Thank you.

Thank you and our last question comes from James Crume (ph) , you may ask your question.

Good afternoon.

I was wondering just kind of back on the cash flow side, just to make sure I understand this correctly.

You said cash going to be down 20 to 25 million and included in that was some of the supplemental interests.

But also included in that number is that the restructuring charge included in that cash flow as well.

Yes it is.

OK.

And where we're, why you can't make all the numbers add up is that what we're doing is we're managing the working capital of the company, you know, more effectively, and you're going to see that as we move forward.

OK, and so then we should also expect for the full year that would you be cash flow positive including the supplemental interest?

You know, right now I don't think that we're forecasting that far out on terms of the cash, but being cash flow positive for the year.

OK.

And then when you look at your products in your end markets, are there any end markets or products you're looking to exit at this point, or do you feel that you have the right product suite going forward?

We have no plans at this point to exit any specific products.

A lot of work has been done to make sure that each of the product families has positive contributions to the business.

We're always analyzing and looking at our strategies going forward.

But at this time, there's absolutely no plans to exit anything at this point.

OK.

Thank you very much.

OK, thank you very much.