安森美 (ON) 2003 Q2 法說會逐字稿

Our call will be getting underway momentarily.

Today's conference is ready to begin.

Hello and welcome to the ON Semiconductor second quarter 2003 earnings teleconference.

At the request of ON Semiconductor, this conference is being recorded for instant replay purposes.

At this time I'd like to turn the conference over to Mr. Scott Sullinger, Director of Investor Relations.

Good afternoon and thanks for joining ON Semiconductor's second quarter 2003 conference call.

I'm joined today by Keith Jackson, our CEO and Donald Colvin, our CFO.

This call is being simultaneously webcast on the Investor Relations section of our website at www.onsemi.com.

And the webcast will be available on our website for 30 days.

In addition, our earnings release for the second quarter of 2003 is available on the Investor Relations section of our website.

Now I would like to highlight our upcoming event calendar.

We'll be presenting at the Sound view Semiconductor Conference on August 14, the Smith-Barney Citigroup Technology Conference, September 3, and the Deutsche Bank High Yield conference on October 9th.

During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future 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 cause actual events or results to differ materially.

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

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

Now let's hear from our CFO, Donald Colvin, who will provide an overview of the second quarter.

Donald?

Thank you, Scott.

And thanks to everyone for joining us today.

Our second quarter revenues were $256 million, a decline of 5% from the previous quarter but in line with our preannouncement.

As a result of our cost-cutting measures, I'm happy to report that we were able to increase our gross margins by a hundred basis points to 28.6%.

On a mixed adjusted basis our selling prices were down approximately 4% quarter over quarter.

During the second quarter, the company reported a net loss of $58 million.

Stripping out the exceptional charges, this was around 14 cents per share without the 35 billion exceptional costs.

The company reported a revised net loss of $51 million for the first quarter of '03.

This is approximately 30 cents per share for the first quarter and that included a $22 million or 12 cents per share charge relating to an adjustment for the actuarial gains and losses defined -- to our defined benefits pensions obligations.

I'll discuss this further later on.

The net loss for the first quarter of 2003 also included a $3.5 million or 2 cents per share loss on debt prepayment.

The restructuring and other charges of $35 million in the second quarter included a $21 million non-cash impairment of developed technology from the 2000 acquisition of Cherry Semiconductor, an $11 million of other non-cash asset impairment charges and a $3 million cash charge for employee separation, contract termination and lease termination costs.

EBITDA for the second quarter of 2003 was $20 million, and this included $35 million of restructuring and other charges.

So, excluding that, it would be around $55 million.

Revised EBITDA for the first quarter was $26 million, and this included the $22 million charge relating to the company's method of accounting for its pension as well as a $3.5 million loss on debt repayment.

A full reconciliation of this non-GAAP financial measure to the company's net loss and net cash provided by operating activities prepared in accordance with GAAP is included in our earnings release and related 8-K filed, with the S.E.C. today.

In the second quarter of 2003 the company changed, also, its method of accounting for actuarial gains and losses relating to its defined benefit pension obligation, as I mentioned before.

Historically, the company had amortized a portion of its actuarial gains on losses to expense over future periods.

Retroactive to the 1st of January 2003 the company will no longer defer actuarial gains or losses.

And in the case of ON, it was an actuarial loss but will recognize such gains or losses during the fourth quarter of each year, the period when the company prepares its annual pension plan actuarial valuations.

And another point of note, the company is actually terminating its pension plan and the current plan will terminate at the end of 2004.

So, hopefully, I will not have a long time to explain this to you in the future.

The cumulative effect of this accounting change was a charge of $22 million or 12 cents per share through the company's revised first quarter results.

I hope you all understand that, and I am available for any questions afterwards.

In the second quarter of 2003 the company also began consolidating the financial results of its majority-owned investment in Leshan-Phoenix Semiconductor in China.

This was following recent changes from the financial accounting standards board.

In the past, the company had accounted for this investment under the equity method.

Consolidation of the company's investment in China, required because our economic interest in Leshan is now proportionately greater than our ownership interest, did not impact the company's previously reported operating results or shareholders' deficit.

Previously reported financial information will be revised for comparative purposes.

The major changes, as a result of the Leshan consolidation, the company's second quarter revenues increased by approximately $2 million while our EBITDA increased by approximately $5 million.

The company expects that a restructuring and other charges combined with the impact from the change of our pension plan will generate approximately $6 million of savings per quarter going forward through the third and fourth quarters of 2003.

As previously projected, during the third quarter and the second quarter, we consumed a little cash and cash and cash equivalents decreased by $9 million by the end of the first quarter to $181 million.

At the end of the second quarter, DSOs, days of sales outstanding, were 46.

Inventory increased slightly to 176 million or 88 days on a cost basis.

Capital expenditures during the quarter were $18 million compared with 6 million in the first quarter.

In summary, our revenues were in line with our preannouncement.

We are pleased with the progress of our previously announced cost-cutting efforts, and we believe that the restructuring charges we took this quarter will strengthen our competitive position going forward.

Now I would like to turn it over to Keith Jackson for additional comments on the business environment.

Thank you, Don.

A breakdown of our second quarter revenues of 256 million by end market is as follows: The automotive segment represented 25% of our total sales, and this is down from the previous quarter where it represented 27%.

So, approximately $10 million less sales in quarter 2 than quarter 1.

Conversely, computer is now making up 23% of our total sales and again is up about 2 percentage points from the previous quarter.

Consumer likewise is up to 18% of our total sales for a gain of about 2 points quarter on quarter.

Industrial at 16% is flat.

Networking at 8% is flat.

And wireless was down, as well, to 10% of our total revenues from the previous quarter's 12%.

On a geographic basis our revenues this quarter declined slightly in North America and increased slightly in Europe and Japan.

So, for the second quarter Asia represented 43% of our sales, Americas 32%, Europe 19% and Japan 6%.

Looking across our channels, distribution accounted for 47% of our revenue, direct sales to OEMs accounted for 42% and the EMS channel accounted for 11%.

Our historical and ongoing cost reduction efforts have put our costs and gross margins in a strong position relative to our direct competitors.

We also believe we have reduced our breakeven level of sales.

In addition to our cost reduction efforts, we will continue to focus on our initiatives, such as new products and intellectual property development.

Now let's review some of our new product opportunities.

Taking a look into the industrial sector, we did see an increase in our design activity.

Coinciding with this, we introduced the industry's first differential 10 signal fan outclock that operates at speeds greater than 6 giga hertz.

This devise is based on our silicon-germanium process that drives increased performance and is easier to design into C-MOS based products than other non-standard alternatives such as [INAUDIBLE]. ,Along those lines we expanded the packaging selection of our silicon-germanium product, and we now offer many of these devices in a smaller 16-pin QMN package that makes it ideal for increasingly dense circuit boards found in high performance computing, networking and industrial applications.

Despite the weakness in the automotive market this quarter, we are preparing for the new model changeovers that are just around the corner.

For this market, we introduced our smart, discreet family of devices that integrate protection circuitry and simplifies hardware design, improves system reliability and reduces the number of components for performance applications.

I'm very proud to announce that Continental Automotive Systems, a world leader in electronic and electrohydraulic break-in, has presented us with the Supplier Of The Year award in the category of electronics.

This is a significant accomplishment when you consider there were 24 participants in this category.

As part of our efforts to increase margins and grow revenues, we have placed considerable emphasis on intellectual property and innovation.

In the second quarter, we filed for 14 patents and were awarded 5.

This brings our total number of patents to 460, with 180 pending.

Our sales and marketing team in the second quarter deployed some of the industry's most sophisticated software platforms designed to improve customer service while reducing costs associated with our global infrastructure.

One of most visible components of this effort was the relaunch of our website that provides an increasing number of features and functionalities to assist our customers with their design efforts.

Now I'd like to turn it back over to Donald for our forward-looking guidance.

Donald?

Thank you, Keith.

In this limited visibility environment, we will strive to give you the best guidance possible.

Regarding our third quarter outlook, we anticipate that total revenues will be flattish compared to the second quarter.

Backlog levels at the beginning of the third quarter were down slightly from backlog levels at the beginning of the second quarter.

However, our second quarter on July month-to-date were slightly above 1, and we are assuming that [tons] level in the third quarter will be slightly higher than the variable second quarter where we experienced variable [tons] specifically from Asia resulting from the SARS-related weakness.

We expect our gross margins to increase slightly during the third and the fourth quarter, as a result of our ongoing cost reductions.

We continue to target gross margins around 30% for the fourth quarter of 2003.

However, despite reducing our breakeven level of sales, we do not currently expect that we will see sufficient end market growth to achieve positive EPS by the fourth quarter of this year.

During the third quarter we expect a reduction of about $10 million in our cash balance, primarily due to additional interest payments and capital expenditures.

We expect these capital expenditures to be approximately $50 million and we continue to project capital expenditures for 2003 to be in the $50 to $60 range.

With that, I would like to start the Q&A.

Thank you, and please open the lines for questions.

Participants, if you would like to ask a question at this time, please press star 1 on your phone key pads.

If you hear your question answered and you wish to withdraw, then you would press star 2.

Once again, that's star 1 to ask a question and star 2 to cancel.

And our first question comes from Mark Elston of Morgan Stanley.

Hey, guys.

Good afternoon, Mark.

A couple of questions.

First one is, Donald, based on all the restructuring efforts that you've already initiated and the ones that you're planning going forward, where do you think you can reasonably take the breakeven level, say in the first half of next year?

I was sure you would ask that question.

I think the breakeven level, as you know, is dynamic.

And depending upon prices --Keith and I have reviewed that extensively -- we believe that it's now somewhere in the region of 275 to 280.

If the market stabilizes, and we are seeing signs that the rate of decline in prices is abating, remember we had approximately 6% price decline in the fourth quarter, 4% in the second.

Our projection now for the third quarter is something like 2% and we project something less than that for the fourth.

So, if that continues, then our breakeven level will remain roughly in that position, Mark.

If we see further deterioration, it will change in a negative way.

If we see improvement in prices on the back of our recovery, it will improve in a positive way.

Great.

And then this is a question for Keith.

I wonder if you could just give us kind of an observation of what you've seen maybe over the last 60 days?

So, looking at kind of the order trends in June and July in some of the key end markets, like automotive, wireless, computing, industrial and so on?

Yes, I can do that.

Actually, our bookings have been strengthening as we've gone through July.

And specifically, wireless from a bookings perspective is up quarter on quarter.

Automotive continues to look pretty lackluster.

Not a big increase in that sector at all at this point.

But all of the other segments that we mentioned are holding up very well.

And I guess just on the wireless side, is that recovery just due to inventories being burned off in Asia, or do you have a general sense as to what the inventory profile looks like over there?

Well, we do believe inventories are being worked down.

We also believe that there's significant new builds with new feature phones.

So, over all it's a little hard to differentiate from our perspective which is which at this point.

Okay.

Thanks a lot, guys.

Thank you, Mark.

Thank you.

Our next question comes from Jeff Hartlip of Lehman Brothers.

Hi.

Good afternoon.

Hi.

Just on the impact of Leshan: You mentioned it was 2 million revenue, 5 million EBITDA.

Could you just clarify that and versus what periods?

Okay.

So, the Leshan consolidation, because Leshan sells products to other outside third parties, it's a controlled subsidiary, but it has external customers.

We picked up approximately $2 million in additional revenue, But we did not pick up any additional gross margin.

There were some catch-up accounting entries this quarter relating to differences -- elimination of profit in inventory and differences in our method of accounting for fixed assets.

There was a pickup in EBITDA of approximately $5 million primarily relating to the add back of depreciation.

I believe that the Leshan depreciation for the quarter is something like $3.8 million.

The net impact on the bottom line, of course, being next to zero, as we had already accounted for our equity stake in that operation.

But we believe that consolidating Leshan gives a more transparent and faithful representation of our [INAUDIBLE] account.

Okay.

And that's 5 million EBITDA incremental to pre the accounting change, or from Q1?

EBITDA in Q2 would have been $5 million less if there had not been the consolidation of Leshan.

The revised EBITDA numbers for the first quarter were revised to include Leshan.

So, on a sequential quarter over quarter basis, stripping out the non-recurring charges, et cetera, our EBITDA, including Leshan, on an apples for apples basis actually increased.

Were there any other unusual items in the quarter resulting from the pension adjustment or any other --

Let me go through one by one.

The pension adjustment, as I mentioned in the official statement, was a non-cash charge.

We had already explained the pension accounting [INAUDIBLE], so there was more extra charges for that.

There was one charge, I'd say a little bit of a non-recurring nature in the quarter, which was again non-cash, but we had a catch-up in depreciation relating from a 1989 restructuring or asset classification which I accounted for in the quarter.

So, if I did not have that catch-up in depreciation, which was accounted for in cost of sales, the operating results would have been slightly better.

But the EBITDA would have been the same.

Okay.

Fine.

And just shifting to the business: How do you see your distributor of inquiries at the end of the quarter versus what they were earlier?

And Keith, if you could update us on new product momentum in the power trench products and --

Distributor inventories were just over 13 weeks up one week from the end of the previous quarter.

And Keith, I think you can comment on the new products.

Yeah.

As I mentioned, some of the new products momentum, the design wins for our new products continue to grow.

And that activity continues to strengthen for us.

Again, the primary areas there being automotive, computing, and the wireless base.

Okay.

And just one last question on the restructuring charges: Where do you stand with respect to the, you know, actions announced early in the year, the 80 million or 120 million annualized of cost cutting, where those actions stand?

I know you're transferring a lot of operations outside the U.S. and production outside the U.S.

Just update on that and what's incremental to come there.

Every action that was detailed in the original plan we are still implementing.

So, that 80 annualized 120 plan is still in action.

But it is fair to say that certain parts of the benefits of that we will lose because of the lower level of sales we're currently projecting for this year.

But the heart of the plan, the voluntary termination program, the transfer of the manufacturing assets, the yield improvement, the new packages, all these elements, every single one of them we are implementing.

The [INAUDIBLE] charges we announced now, you're right, every part of it apart from $3 million is non-cash.

These are in addition to the plan that we announced at the beginning of the year.

And that is why we feel comfortable in characterizing a reduction in our breakeven level of sales.

I believe, initially, we had thought that the breakeven level of sales was just above 300 million.

And I'm sure, Jeff, you heard the reply to Mark.

We stated we believe it's in the 275 to 280 million range considering the conditions in today's market.

Okay.

Good.

That 30% gross margin you talked about for Q4, that's based on a stable revenue assumption?

That is based upon a very modest increase over the current run rate, which we believe the second and third quarter, as we stated, will be approximately flat.

So, a modest increase in the low single digits over these run rates will give us that 30% margin.

And that margin is helped by the implementation of the original and the new cost reduction measures.

And despite a tougher market condition, we believe we have also reduced our breakeven, and we will continue in the third quarter and also in the fourth quarter to grow our EBITDA.

Great.

Thanks very much.

Thank you.

Our next question comes from Ramid Shah of Lehman Brothers.

Hey, guys.

One question on pricing.

You know, it looks like discreet pricing has been fairly stable through the first half of the year while standard analog has been pretty weak.

And then one of your competitors most recently said that they saw signs of the Interface and Logic pricing starting to roll over.

I'm just wondering, Keith, if you have any updates or comments regarding pricing for those three product groups?

Yeah, as we mentioned, overall we actually see ASP declines lessening.

In other words, becoming less severe; in fact, significantly less so.

I would agree that the MOSFET side is seeing some relative stability at this point.

But in the Logic and Interface side, we're not seeing increased pressures at all.

In fact, again, I think the pressures are lessening there and in the standard analog also moderating.

So, it's across the board.

Just a final question on the automotive segment.

Could you just go over the seasonality of that business?

I know it's down fairly significantly in Q2, and it doesn't sound like things are picking up in Q3.

But what sort of typical seasonality for that segment?

Yeah, typically you would expect some pickup in the third quarter.

That's when they do their model changes, although it's not substantial.

Usually the fourth quarter is when you would see some real strengthening there.

And as you head towards summer, it does typically soften.

So, the trend, I guess, is not so much abnormal, but the magnitude was a little larger than we were anticipating.

Great.

Thank you.

Thank you.

Our next question comes from Eric Roth Deutsche of Friedman, Billings, Ramsey.

Thank you.

Hello, gentlemen.

Hello, Eric.

One question.

In the flat revenue expectations for Q3, can you give an idea by market segment whether you would expect each segment to be up or down from Q2 levels?

Yeah, we can do that, sure.

I think the --

Let me jump in for the first part.

When I looked at the numbers, it looked like we would see an improvement in our wireless, things relatively flat in the automotive, maybe slightly down, and a continued strength in our computer and consumer and pretty flat in the industrial areas.

Great.

Thank you very much.

Thank you.

Once again, participants, if you would like to ask a question, simply press star 1 on your phone key pads.

Our next question comes from Eric Ruble of Miller, Tabeck & Roberts.

Hi.

Good afternoon, gentlemen.

Don, could you say again the cap ex number for the quarter.

I think the cap ex number I announced was $15 million.

This is the anticipated cap ex for the third quarter.

And I stated that was a similar number we had in the second quarter, and that we anticipate for the full year capital expenditures to be in the $50 to $60 million range.

Great.

You also mentioned in your forecast looking out to next quarter that you expect the turns environment to be a little stronger.

Could you tell me where turns were this quarter and what you might be -- what sectors could possibly be leading that improvement?

Potentially is it wireless?

Come this quarter we're in the mid-teens, which in discussing with Keith at lunchtime were abnormally low, especially in the second quarter.

Maybe you want to address that.

Yeah, normally our second quarter would be one of the higher turns quarters of the year.

As we mentioned earlier, the SARS, we believe and inventory build and subsequent inventory build in wireless did have an impact to keep that down.

We believe those impacts are gone.

Inventories are being worked down.

So, we would expect turns in wireless to go up in the third quarter.

Automotive is typically not a high turns business, anyway, so, you know, the issue there for turns is not a significant one.

The other areas of strengthening potential, of course, comes towards the September shipment time frame when we start to see a ramp in the consumer and computing segments.

Very good.

Thank you, gentlemen.

Thank you.

Thank you.

Our next question comes from Stanford Nishikawa of Citigroup.

Hey, guys.

Two quick questions.

One is: What is left for restructuring cash uses going forward?

Specifically, can you give me a little bit more color on the question?

Yeah.

In other words, I'm less concerned from a charge perspective through your P&L.

But I think, like, for example, last quarter I think real roughly you said there might have been about $20 million left to go.

I think we looked at this, and it's something in the mid-single digits this quarter will be consumed from the previously announced restructure plans; 6, 7 million, something like that.

For the third quarter?

Yes.

And then there's probably what, then, a total of maybe 10 left after that?

That seems on the high side.

I'll have to check into that.

I would have thought that after this quarter there wouldn't be much more.

Maybe we're a little bit high on the estimate.

Prudent on the number from last quarter.

I think there's probably 6 or 7 million this quarter, and I think it will be less than that next quarter, and that will be finished.

Okay.

Good.

The second question is, for modeling purposes can you tell us how we should do depreciation because you said -- it sounded like some got flushed through.

Does the depreciation just bump up in the June quarter and it should go lower?

Well, there was a little -- depending on what your had in your model -- there would be a little bit more depreciation and add-back in the quarter.

So, I think you can assume the add-back, depending, you know, how you do this, if you just take operating income and you add back to get to a rough EBITDA number, you can assume something in the mid-30s, 35, 36 million dollars.

Okay.

All right.

Great.

But remember, some of the rake off we had on the intangibles, the Cherry acquisition, that will reduce the depreciation and amortization add-back going forward because we won't have that cost.

Right.

I understand.

Okay.

Great.

Thanks.

Thank you.

Once again, if you would like to ask a question, simply press star 1 on your phone key pads.

Our next question comes from John Robbins of Morgan Stanley.

Good afternoon, gentlemen.

Good afternoon.

Quickly, and I apologize if you have addressed this, but with the consolidation of the Leshan-Phoenix assets, it appears that PP & E has increased significantly.

I'm curious as to what impact there is on your depreciation assets going forward.

I did roughly address that, but it's a good question nonetheless.

I believe we picked up something like 60, 70 million net assets from the Leshan consolidation.

So, yes, the PP & E will go up.

Also, there would be -- there's always in every fixed asset when you have changing exchange rates, there can also be movement.

And the dollar has been weakening, so, any fixed assets denominated in dollars will be consolidated at a higher level just because of the consolidation effect.

I can reconcile that for you, and I'm sure we will.

Going forward, yes, on an ongoing basis, you will have additional depreciation to add back for the Leshan consolidation.

But as I mentioned there, we also took some write-offs that will reduce our depreciation and amortization, particularly for the Cherry acquisition, and also some of the asset impairment.

So, one will more or less offset to a large extent the other.

Okay.

Do you believe -- you mentioned 30% margins by the end of the fiscal year with the incremental depreciation.

Do you believe that that target is achievable?

Well, just to -- not to waiver on the points, I said one will more or less offset the other, so there will not be too much incremental cost.

And remember, we concluded this quarter at 28.6%.

So, I mean, I don't want to be a marketer and round it to 29, but we are not far away from 30.

So, you know, with Keith we have looked at the number, and it looks totally achievable.

Okay.

Fantastic.

And finally, an incremental roughly $25 million of additional debt was consolidated, and I would imagine from the Leshan-Phoenix sub.

Correct.

What are the terms of that?

When will that be due?

Again from memory, I think it's a low single digit interest rate, and I don't have the amortization schedule in front of me.

I was more concerned with the $1.4 billion other debt which has been preoccupying us recently.

But I would think it's [inaudible] amortization.

It's got a gentle amortization schedule and a low interest.

Thank you very much.

It appears we have time for one more question from Eric Talbin of Banc of America Securities.

Hey, guys.

I'm sorry if I missed this earlier.

Did you give what the revolver balance was at the end of the quarter?

We did not.

I think it was single digit, $3 to $5 million what it was from last quarter.

Okay.

Great.

Thanks a lot.

Thank you.

This does conclude our question and answer session.

I would like to turn our call back over to Mr. Scott Sullinger for closing remarks.

That's it.

We're finished.

Thank you.

This concludes today's ON Semiconductor second quarter 2003 earnings teleconference.

Thank you for attending, and you may disconnect at this time.