KraneShares Dynamic Emerging Markets Strategy ETF
Q4 2020 Earnings Call Transcript

Published: 14 May 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Kemet fourth quarter fiscal year 2020 earnings conference call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, one on your telephone keypad. Please be advised that today’s conference is being recorded. If you require any further assistance, please press star, zero. I would now like to hand the conference over to Mr. Greg Thompson. Thank you, please go ahead, sir.

[Greg Thompson:]

Thank you Blue, and good morning everyone. This is Greg Thompson, Executive Vice President and Chief Financial Officer. Welcome to Kemet’s conference call to discuss the financial results for the fourth quarter and year end of fiscal year 2020, which concluded on March 31, 2020. Joining me today on the call is Bill Lowe, Chief Executive Officer. You might notice our call sounds a little different this quarter. Bill and I are conducting this call from our respective home offices. We have been working from home since mid-March when we closed our corporate headquarters office. As a reminder to you, a presentation is available on the Kemet website which will help you follow along with the financial portion of the presentation. Before we begin, we would like to advise you that all statements addressing expectations or projections about the future are forward-looking statements. Some of these statements include words such as expects, anticipates, plans, intends, projects, and indicates. Although they reflect our current expectations, these statements are not guarantees of future performance and they involve a number of risks, uncertainties and assumptions. Please refer to our 10-Ks, our 10-Qs, and our registration and filing statements for additional information on the risks and uncertainties. Now I will turn the call over to Bill.

[Bill Lowe:]

Thank you Greg, and good morning everyone. You know, in these unprecedented times, our number one priority remains the safety and the wellbeing of our employees, their families, and the communities in which we operate. I am very proud of our colleagues around the world who have worked together to quickly implement COVID-19 prevention actions sooner than required by federal or local governments to keep our employees safe and our facilities operating while continuing to serve critical infrastructure customers who need our products. We instituted our first travel ban extending to countries outside of China on January 27 and required a 14-day quarantine by any employee that travelled by air in mid-February for business or personal reasons. These early actions and the effort by every manufacturing location and our employees have limited our number of affected employees to only five out of a total of 13,000 employees worldwide. I’m very proud of our local management teams and our employees that have taken extra safety measures outside of work to protect themselves and their families. We remain fully operational as a result. Let me give you a quick update on the Yageo acquisition. The only remaining approval is the Taiwan Investment Authority. Assuming we receive that approval from the Investment Authority, closing will happen rather quickly in agreement with the merger contract terms, and our current expectation is that the transaction will be able to close sometime this summer. Greg will be going through the financials with you momentarily, but let me first say that Kemet is well positioned with a strong balance sheet as we move through this year and the fundamental changes that we have made over the years are solidly engrained in our structure, which continues to support excellent gross margins. I’ll turn the call over to Greg now to recap the numbers for the quarter and I’ll come back in a few minute to discuss operations. Greg?

[Greg Thompson:]

Thank you Bill. I’m sure you have had a chance to review our press release this morning, so I will highlight only a few key metrics from it. We executed well in the fourth quarter in spite of COVID-19 impacts as the results exceeded our expectations, both on the top line and bottom line, as we achieved above the top end of our guidance we’d previously provided. I will start my review of the numbers on Slide 3 and 4 of the webcast materials. Revenue for this quarter was $293.2 million, down 17.6% compared to Q4 last year and down 0.5% sequentially from $294.7 million in the trailing quarter. GAAP net loss was $0.3 million or $0.01 loss per share for the quarter ended March 31, 2020 compared to GAAP net income of $93.4 million or $1.58 per diluted share for the quarter ended March 31, 2019. This decline in GAAP net income for the quarter ended March 31, 2020 compared to the same quarter last year was mainly due to three things

[Bill Lowe:]

Thank you Greg. As Greg said, turning to our business groups, we’ll start with solid capacitor. Solid capacitor revenue in Q4 decreased $3.6 million or 1.7% versus the prior quarter and was down $47.5 million or 19.2% versus the same quarter last year. For the full year, revenue was down $49.8 million or 5.3% versus the previous fiscal year. Looking at the two solid capacitor segment product lines, revenue for the tantalum product line increased $6 million or 5.2% versus the prior quarter but was down $15.1 million or 11% versus the same quarter last fiscal year. For the full year, revenue was down $67.6 million or 12% versus the previous fiscal year. The sequential quarter-over-quarter improvement was driven primarily by increasing demand for polymer products in Asia for the SSD, automotive and notebook segments. The year-over-year decline was associated with a significant decline in the distribution and EMS channels in the second half of the fiscal year as demand softened from an overheated demand market environment in fiscal ’19, and excess inventory was also consumed. Revenue for the ceramic product line decreased $9.6 million or 10.9% versus the prior quarter and was down $32.4 million or 29.3% versus the same quarter last fiscal year. Full year revenue increased $17.8 million or 4.8% versus the previous fiscal year. The first two quarters of the fiscal year were strong while weakening global demand and excess channel inventory resulted in a second half decline. Inventory in the distribution channel significantly declined in Q4 of the fiscal year, bringing it into a healthier balance. Most segments declined versus the prior quarter, with the exception of military and medical segments which grew quarter over quarter. EMS declined quarter over quarter while OEM remained essentially flat. We continue to focus on designing opportunities and expanding product offerings related to larger case size, high reliability MLCCs used in automotive, military and aerospace, medical, and energy-related applications globally. We expect COVID-19 to negatively impact our demand in 2020 but remain confident about the medium and long term view for MLCC growth in these markets. Solid capacitor segment year-over-year gross margins increased 120 basis points from 42% to 43.2%. This improvement was driven primarily by improved product mix, [indiscernible] MLCC pricing, and continued focus on manufacturing cost improvement initiatives in both product lines. Our film and electrolytic business revenue was $44.4 million, an increase of $1.5 million from the prior quarter and $6.1 million lower than the same quarter in fiscal year 2019. Fiscal year 2020 revenue was $175.8 million, which was a decrease of approximately 15% compared to last year. Revenues slowed in the distribution channel during the fourth quarter, mostly in the Asia Pacific and EMEA region for this segment. Also, OEM revenues in Europe decreased due to the soft automotive market. Gross margins decreased 520 basis points from 9.7% to 4.5% mostly due to decreased volumes. Our focus for film and electrolytics continues to be implementing cost reduction and efficiency improvements at our manufacturing sites and releasing new film and electrolytic products, including first-to-market capacitors. Turning now to magnetic sensors and actuators, the revenue for the quarter came in at $48.4 million, which was a slight increase from $48 million in the previous quarter but was down $9 million versus the same quarter in fiscal year 2019. Gross margin for the full year was 14.8%, which was a decrease of 400 basis points compared to the fiscal year of 2019. The lower gross margin percentage was mainly driven by lower demand for EMI flex suppression sheets primarily related to a slowdown in the smartphone market. We are experiencing continued slowdown in demand for piezo actuator products used in semiconductor production equipment, consistent with the overall semiconductor market situation as well as specific consumer-related markets. In addition, we are subject to the global year-over-year slowdown in the global server market. On the positive side, we continue to see strength and upward momentum in our metal wire business for the medical catheter guide wire market. Additionally, we continue to see nice growth through the distribution channels we developed and placed more new products into the channel to position and grow our MSA long tail business, particularly new choke coil series named METCOM, which was released through the distribution channel and is expected to make significant inroads into the market for the foreseeable future. I’m very pleased with the pipeline of projects we have in place for the future as we expand MSA’s reach well beyond Japan and Asia in general. Now for the regions, Europe closed at $64 million, up 4.8% versus the previous quarter and was down 25.6% compared to the same quarter last year. We closed fiscal ’20 with $276.5 million, which was down 12.4% versus fiscal ’19. POS for the quarter came in at $52 million, a 20% increase from the previous quarter and a 14% decrease versus the same quarter year-over-year. We closed fiscal ’20 with a POS of $194.5 million, which was a 13% decrease compared to fiscal ’19. While our distribution business stayed flat sequentially quarter over quarter, our EMS and OEM business increased by 7.8%. We experienced an increase in our green energy business, solar and wind, while the performance from our automotive customers was mixed. For the full fiscal ’20, we saw a stable EMS business and a decline of 8.2% in our OEM business, driven by a weaker automotive market. Our distribution business underwent a significant correction with a 17.4% decline versus fiscal ’19. The current macro environment in Europe is hugely influenced today by the COVID-19 pandemic. We have been facing country-wide lockdowns in Italy and Spain and voluntary production stoppages at virtually all automotive manufacturers in the region, resulting in significant reductions in production capacity at all automotive suppliers. At the same time, though, our industrial and green energy business continues to be more stable as well as our distribution business, which seems to have the supply chain inventory correction behind it. Our outlook for fiscal ’21 is mixed and difficult to predict given the current uncertainty of the macro environment in the region. Now for the Americas. The Americas fourth quarter revenue was $59.5 million, which was sequentially down 7.5% versus the previous quarter and down 35.3% compared to the same quarter last year. Fiscal ’20 finished at $296.9 million, which was lower by 12.1% compared to the previous fiscal year, and distribution finished down quarter-over-quarter 9.4% and year-over-year 17%. EMS was down quarter-over-quarter 26.3% and down year-over-year 19.2%, while OEM was up quarter-over-quarter 9.1% and also up year-over-year at 10.3%, driven by the medical and defense sectors. POS finished for the quarter at $55.3 million, which is up 3.8% versus the previous quarter and down 8.4% compared to the same quarter last year. POS finished the fiscal year at $218.5 million, which was down 8.5% compared to the previous fiscal year. We continue to see customer plant closures predominantly in the automotive sector due to COVID-19. In Asia, quarter four revenue closed at $121.7 million, which was down 4.2% from the previous quarter and 5.7% down compared to the same quarter last year. POS came in at $59.5 million, a decrease of just 2% from the prior quarter and 11% up from the same quarter last year. The market was heavily impacted by the extended Chinese New Year and the subsequent COVID-19 related lockdown in China; however, some segments responded quickly to the situation and they have been recovering as we came into March. Our bookings from computer and server customers were very strong as people need to work from home and study from home. We also saw strong bookings from the 5G customers as China is pushing very hard in this direction, one of the key measures used to stimulate the market to recover quickly from the COVID-19 impact. In our fourth region, Japan and Korea, quarter four revenues closed at $47.9 million, an increase of 13.3% versus the previous quarter and down 1.6% compared to the same quarter last year. This was due in part to shipment of polymer capacitors for PC and electromagnet products for medical equipment compared to the last quarter. POS was $6.4 million, up 84.6% from the previous quarter and up 168.9% compared to the same quarter last year. Total revenues for this fiscal year were $178 million, which was down 9% versus last fiscal year. In the distribution channel, POA for Q4 was 0.4% versus Q3 and down 13% for the fiscal year as compared to fiscal ’19, while POS for fiscal ’20 was down 8% compared to fiscal ’19, and we had the best POS results for fiscal ’20 in Q4 coming in at $173 million, which is up 8% from quarter three. The alignment of POA and POS brought the inventory down by $24 million to $208 million as compared to the December ’19 and versus the peak of $251 million in August of 2019. Now I’m going to turn the call back to Greg to discuss our guidance for the next quarter. Greg?

[Greg Thompson:]

Thank you Bill. We are providing a forecast with the caveat that it does not include the impact of any unexpected shutdown at one of our facilities related to COVID-19. With that as a backdrop, we expect our first quarter revenue to be in the range of $278 million to $295 million. Compared to the fourth quarter we just finished on the low end of that range, it would be down approximately 5% and the high end of the range would be up approximately 0.6% from the quarter ended March 31, 2020. We are expecting the strong demand for polymer products to continue for the June quarter and provide some offset to the declines driven by the automotive market segment and our other product lines. We believe our gross margin will continue to be relatively strong and reflect the positive impact from our structural changes as we anticipate non-GAAP gross margin to be between 28% and 30%. SG&A expenses should be $43 million to $45 million and R&D expenses in the range of $12.5 million to $13.5 million. We expect our first quarter and full year non-GAAP effective tax rates in the range of 35% to 39%. Now I’ll turn the call back to Bill for some final remarks.

[Bill Lowe:]

Thanks Greg. Needless to say, the last quarter of our fiscal year has been a challenge. The Kemet employees have stepped up to meet that challenge, keeping our manufacturing facilities running. That is important for many reason, but as an essential business that makes many components for the medical industry, I could spend an hour or more citing specific situations where we have stepped up our production in emergency situations to provide components for ventilators in the United Kingdom, Germany, the United States and elsewhere to assist our heroes in the medical profession to save lives. Kemet employees know I’m proud of them. I tell them that as often as I can, but I want to repeat it publicly one last time, possibly on our last public conference call today, to tell them that their dedication to producing quality products really does mean something and does affect lives. All of our employees should be proud of themselves for a job well done. However, the fight is not over, but I know that the Kemet employees will continue to do their best, and because of that we will have a victory over COVID-19 and Kemet, as it combines with Yageo, will continue to be a powerhouse in our industry. Operator, that’s the end of our formal remarks. We’ll now take any questions.

[Operator:]

[Operator instructions] Your first question comes from the line of Craig Ellis from B. Riley.

[Craig Ellis:]

Yes, thanks for taking the question, and Bill and Greg, congratulations on the strong operating performance and financial performance, especially on that closing point that you had, Bill, regarding helping the medical sector and healthcare workers. The first question I wanted to ask was just around some of the demand dynamics that you’re seeing in PC, server and medical. It sounds like work-from-home and the current crisis has created a structural reset in those areas. Is that something that your customers are indicating is more of a near-term dynamic, or is the strength there something that you would expect to persist through all of calendar ’20?

[Bill Lowe:]

That’s a good question. I think our view is that it’s probably pretty strong through September. We’re only forecasting our June quarter, but it seems to be, from what we’re seeing in orders, it will be possibly strong through at least August-September time frame. It could be a bit of a bubble as people are working from home, kids are working from home, schooling from home that didn’t have PCs. If you go online to try to buy a Chromebook or something, the selection is fewer than what you had months ago, same with any other PC that you’re buying or laptop you’re buying. It’s filling the current demand, it’s probably also to fill--as we get further into this, it’s probably filling the inventory back-up a bit to have availability of various--you know, whatever processor speeds and memory and all that, that you would have normally a fairly good choice from, that is somewhat limited today. It’s certainly strong for the next three to four months, and beyond that it’s hard to read. But clearly based on our order book, I would say at least through August-September.

[Craig Ellis:]

That’s quite helpful. Then an intermediate term question, I know pre-crisis as the company was managing channel inventory down to normalized levels, and congratulations on successfully getting there in the fiscal fourth quarter, but I think we were all thinking that natural end demand was in a $320 million level. Given the crisis and the impact that it’s had on demand in a number of areas, and just given the performance in the quarter and the outlook, is it reasonable to think that underlying demand has remained somewhere near $290 million to $310 million, or how would you guys help us frame the expectation for underlying demand absent some of the channel dynamics that were part of the business for a two to three-quarter period?

[Bill Lowe:]

Well, I don’t think we’ve seen the impact to the automotive segment significantly yet. Where we’re at in the supply chain, I think that the impact of the automotive shutdowns and potentially the consumer purchases will affect us later in the calendar year. I think also that the distribution channel, as usual when these type of things occur, tend to be a concern that someone, not just Kemet but any one of us that’s supplying them, would have a shutdown and would want to put more parts on their shelves, so I think we were seeing a--have been seeing a fairly reasonable distribution channel stocking, not overstocking but rather than pulling back, doing a little bit of the opposite, just to ensure that they still have parts on their shelf if one of their suppliers in any category would be shut down for a period of time, either because of a government mandate or whether it was because they had a lot of infections inside of a plant. There’s been some positive things that have occurred that way that I think will slow down, and starting to slow down as we get into even this next quarter.

[Craig Ellis:]

That’s helpful. One last one before I hop in the queue, very strong gross margin performance in the quarter. We’re 60% above prior cyclical lows, so lots of evidence with your structural gain there. I think this is the time of year when the company would typically have gone through some of the annual pricing discussion with some of its customers. Any update on what’s trending there, or was that simply disrupted given the dynamics of the crisis that played out through the first quarter?

[Bill Lowe:]

Actually from an OEM perspective, most of our contracts are negotiated at the end of the calendar year and then go into effect over a period of months, starting in January. From a negotiation perspective, those were all completed last fall, and of course when you get into distribution business, distribution channel, that’s kind of a daily activity from that standpoint, unless you’re negotiating some package that’s a long term package. The March quarter, really the impact of what was going on globally didn’t have an impact on those contracts to any significant degree.

[Craig Ellis:]

Okay. Bill, Greg, thanks very much, and congratulations not only on the financial performance, but on the performance executing to the Yageo transaction. Thank you.

[Bill Lowe:]

Thank you.

[Operator:]

Your next question comes from the line of Alvin Pact [ph] from Stifel.

[Alvin Pact:]

Thank you so much for taking the call. I’m in for Matt Sheerin. Just wanted to follow up, would you be able to give us some color on the book to bill by the different end market customers by quarter end and the progress you’ve seen quarter-to-date on those bookings so far? Just wanted to get an idea of--you mentioned there was a beginning of a slowdown starting around this quarter while it was starting in March, just some color on that.

[Bill Lowe:]

Yes, it’s kind of all over the map. I’m looking to grab my book to bill--hang on. Greg, do you have those in front of you?

[Greg Thompson:]

Yes, so the book to bill overall at the end of the year was 1.3. If you break it down by channel, it’s 1.44 for DSTI [ph], OEM 1.25, and EMS just over 1, 1.03.

[Alvin Pact:]

Then any color on those--I mean, DSTI was 1.44, that was pretty high, and OEM at 1.25, do you know where those were quarter to date in April and a little bit into May so far?

[Greg Thompson:]

Yes, so those were the year-end numbers. I think to date, those numbers are holding in pretty well. I think there is, as Bill mentioned, related to the automotive portion, there’s definitely signs of weakness there, not immediately for us but we’re seeing some push-outs, not so many cancellations, some cancellations but definitely some push-outs with automotive plant shutdowns. It is coming down, but we haven’t seen any significant change in it to date.

[Bill Lowe:]

If you look at the last 13 weeks, if you just used 13 weeks, if you just look at the regions, the overall corporate last 13 weeks, so that’s through as of May 7, is about 1.31, was at the numbers you were giving off, with EMEA right below 1 and Asia 1.34. Now, if you got into the business units, I will say, to Greg’s point, the automotive is driving a book to bill in ceramics that is well below 1 at the moment, and that’s as expected based upon the number of automotive plants that have shut down throughout not just the United States but in different places around the globe.

[Alvin Pact:]

I see, thank you. In regards to the guide, it was with the caveat that no other factories would be closing, but would you be able to give us some color on some of the risk and the potential - I know it’s hard to predict, but what it would take for additional plant closings? Would it be a confirmed case with an employee would be the contributor, and any type of color on the risk and geography of those factory locations that might have such an impact on forward guide--

[Bill Lowe:]

No, there’s two different--really, there’s two different kinds of risk. If we have an infection, we do need to disinfect, and that’s a short--that would be a short shutdown. We’ve been--as I said, I’m very proud of everyone around the globe. We’ve not shut down an entire facility for those infections, with the exception of a very short period of time to disinfect the area where that employee might have worked. We’re doing a great--we learned a lot. You know, being in China, we were facing this early on before a lot of other companies that are not in China, so the lessons learned from China, and the team did a great job there, we kind of used the same type of things in the other facilities. So there’s that risk, but I think we’ve done a great job on that and I expect we’d continue to do a great job on that. If there was one, it’d be a short shutdown. The other risk is whether a local federal or state government in a particular country would mandate a closure, but I think the risk there is subsiding from the standpoint that, first of all, in most locations where we produce products, we are considered an essential business for the kind of components that we’re making that go into medical products and other types of critical end products that are considered essential, so we have that. We have that ability to have that discussion with the governments and we’ve been successful with that. I think as time goes on, not that they’ll relax but I think there’s not a kneejerk reaction from as many locations as there might have been early on, so I think that risk is waning. But those are the two types of risk, but I think again as an essential business, it’s really critical for us to keep our employees healthy and safe at work, which we’re doing, and it’s important for our employees to practice the same safe protocols when they’re not in our facilities so they don’t bring it into a facility. But that would be a short shutdown, so I’ve got my fingers crossed that we’ve done a great job so far and have belief that we’ll continue to do a great job in all our facilities to keep everything running as we are today.

[Alvin Pact:]

Thank you so very much.

[Operator:]

If anyone wants to ask a question, please press star, one on your telephone keypad. Craig Ellis from B. Riley?

[Craig Ellis:]

Yes, thanks for taking the follow-up question. There was some commentary on 5G infrastructure, and I wanted to follow up there and just understand what the company was seeing and how significant that might be as you look ahead, not specific guidance but is that a trend that can be beneficial to sales as we go through this year? Then just top down, guys, how are you thinking about how 5G impacts the business on a multi-year basis? Again, not looking for specific guidance, just more qualitatively on its impact to your profits.

[Bill Lowe:]

I think it has both short term and long term impacts. Short term, as we said, we’re seeing a bit of a push in China to do more there from the standpoint of getting things back to normal. We’re seeing strong--we’ll see kind of a strong--you know, from the server perspective as well and some of the edge computing that goes with it. But I think longer term, probably what’s more important to us that would cross more than just one product line is what comes from 5G, which maybe a restocking or a re-do of some of the things that we’re using today--people are using today that are not 5G capable, that they would have to buy to--you know, from a consumer perspective, etc., and the servers needed for it and those type of things. That would ultimately drive even more revenue for Kemet across more than just one product line. But as we know, it’s somewhat delayed--it’s been somewhat delayed here in the United States. The rollout here has not been forthcoming in the timeframe that everyone expected, but it’s going to get here. We’ll see some benefit from it this year. It’s not going to be so material that we’d probably call it out as a number in any given quarter, but I think it certainly has an impact.

[Craig Ellis:]

That’s great. Thanks Bill.

[Bill Lowe:]

All right.

[Operator:]

Presenters, I am seeing no further questions in the queue. Please continue.

[Bill Lowe:]

All right, if there’s no further questions, Operator, we will wrap up. Greg and I will say thank to everyone who was on the call, and if we get the last final approval from the Taiwanese Investment Authority, we will be hopefully closing the acquisition with Yageo in the summer. Thank you very much. Have a good day.

[Operator:]

Ladies and gentlemen, this concludes the conference. You may now disconnect.