KraneShares Dynamic Emerging Markets Strategy ETF
Q3 2020 Earnings Call Transcript

Published: 6 Feb 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the KEMET’s Third Quarter Fiscal Year 2020 Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your host. Mr. Richard Vatinelle. Sir, you may begin.

[Richard Vatinelle:]

Thank you, Lara [ph], and good morning, everyone. Welcome to KEMET’s conference call to discuss the financial results for the third quarter fiscal year 2020, which concluded on December 31, 2019. Joining me on the call is Bill Lowe, Chief Executive Officer; and Greg Thompson, Executive Vice President and Chief Financial Officer. As a reminder to you, a presentation is available on our website that should help you follow along in 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 or 10-Qs and our registration filing statements for additional information on the risks and uncertainties. Now, I will turn the call over to Bill.

[Bill Lowe:]

Thank you, Richard, and good morning, everyone. As we monitor the Coronavirus developments in China. Let me start by saying that the health and safety of our employees, their families, customers and suppliers is our top priority. On January 27, as information on the outbreak become or widely publicized, I imposed a travel ban on all of our employees until February 28 to and from the countries of China including Hong Kong, Japan, Thailand, Vietnam and Indonesia. This included inbound travel from customers and suppliers as well. We’re encouraging video conferencing to take the place of face-to-face meetings. As a number of infected individuals has grown exponentially since the beginning of our travel ban, we plan to reevaluate this travel ban as we approach end of this month and need to extend it or discontinue it. We’re monitoring the Wuhan Coronavirus outbreak closely and have implemented precautionary measures across all of our locations in the Asia Pacific. Following the Directorate from the China Central Government for 2020 Holiday period in those areas has been prolonged February 9, 2020. Many shipping lanes for goods are currently closed and expected to follow the same schedule. We’ll continue to adhere to the guidance from the government as well as global and local health authorities regarding the proper prevention and management of this issue. We are running our key tantalum facility at Suzhou at around 40% capacity by the workforce that has been allowed to stay in place throughout the period. Other workers will be allowed to return to work on February 10 because the situation is still very fluid. It remains unclear as to the impact this will have in our business. However, the electronics industry in general remain strong and demand continues for our products and the impacts, would most likely cause delayed revenue and not lost revenue. Of course, many if not all of our customers in China are under the same guidelines for return to work day. Since and the region is that local service and retail industries in China will be impacted more. Again we’re keeping a close eye on this situation. Now a few words on the progress of the merger agreement for an update. There’s a special meeting of stockholders that will be on February 20, there was a proxy that was filed and mailed on January 14 and a supplemental proxy was filed on February 5. Regarding the process for antitrust filings all of the filings have been filed. The US, the Hart-Scott-Rodino, Germany and Austria have been approved. China, Mexico and Taiwan are remaining outstanding at the moment as well as CFIUS approval. The CFIUS approval was filed was January 3rd and the 45-day period began January 23rd. we’re having ongoing dialog as expected and we’re on course with no unusual events. We’re still expecting a closing in the second half of this calendar. So I’d ask you to please refer to our proxy and our supplemental proxy for all of the merger details. Before I give you more color around the state of our business and the environment. I’ll turn the call over to Greg to recap the number for the quarter. Greg?

[Greg Thompson:]

Thank you, Bill and good morning, everyone. I’m sure you’ve had a chance to review our press release this morning so I will highlight on a few key metrics from it. I will start my review of the numbers on Slide 3 and 4 of the webcast materials. Revenue for this quarter was down 15.8% to $294.7 million compared to Q3, last year of $350.2 million and above the midpoint of our earlier guidance. Revenue was down 10% sequentially from $327.4 million in the trailing quarter ended September 30. The lower revenue level reflects the destocking which continues in the distribution channel as we work with our distribution partners toward normalized inventory levels. GAAP net income was $16.6 million or $0.28 per diluted share for this quarter compared to GAAP net income of $40.8 million or $0.69 per diluted share for the quarter ended December 31, 2018. This decline was due to lower revenue for the most part SG&A non-recurring expenses related to the merger agreement. Foreign exchange losses from a weaker US Dollar compared to the same quarter last year and a higher income tax rate in fiscal year 2020. Our non-GAAP adjusted net income was $27.6 million or $0.46 per diluted share compared to $62.7 million or $1.60 [ph] per diluted share in the third quarter last year. GAAP gross margin was down compared to last year’s third quarter by 370 basis points from 35.3% to 31.6% as a result of the lower revenue levels. Non-GAAP gross margin was in line with guidance as it came in at 31.9%. Our adjusted EBITDA for the quarter was $56.7 million down from the $82 million in the third quarter last year. On an LTM basis, which you can find on Page 5 adjusted EBITDA margin as of this quarter remained strong at 22.2% compared to 19.3% in the third quarter of last year. This is further evidenced that the structural changes made over the last few years to our business continue to pay off on the bottom line despite the current macroeconomic headwinds. Non-GAAP income taxes were $11.1 million at an effective tax rate of 28.7% compared to Q3, last year of $2.7 million at an effective tax rate of 4.1%. As explained in our last earnings call, the lower non-GAAP effective tax rate in the prior year was a result of evaluation allowance on the US and certain Japanese deferred tax assets. As a result of this significant improvements and our profitability along with our forecast for continued strong profitability going forward. The company made the decision to release the valuation allowance on these deferred tax assets in Q4 of last year. Accordingly the non-GAAP effective tax rate has increased to a more normalized rate. We expect this higher effective tax rate to continue in future quarters for both GAAP and non-GAAP results. Now on Page 6, non-GAAP SG&A expenses came in below our forecast at $41.2 million compared to last year’s third quarter of $43.8 million. The decline was mainly due to lower incentive compensation and benefits accruals as compared to the third quarter last year. On Page 7, capital expenditures during the quarter were $30.8 million compared to $36.2 million in the prior quarter. This coming quarter we expect to spend in the range of $50 million to $60 million for capital expenditures as we continue our plan capacity expansion to support our future customer demand improve our IT infrastructure around the globe. We expect capital expenditures including IT and corporate spending for the full year ending March 2020 to be in the $130 million to $140 million range excluding approximately $45 million to $50 million of customer funded capacity expansion related to the customer capacity agreements. We previously have disclosed these capacity agreements with three separate customers whereby one-third of our expanded ceramics capacity once completed in fiscal year 2021 will be in effect pre-sold to these three customers. Net inventories decreased $5.1 million this quarter to $263.1 million compared to $268.2 million last quarter. This decrease is across all of our business groups as we make adjustments through our production levels in order to stay in line with current demand. We expect our net inventories number to drop in the fourth quarter. Cash on hand was $208.4 million as of December 31, 2019 an increase of $15.7 million over last quarter ended September 30, 2019. We had a strong cash flow generation performance this quarter with $31.9 million cash provided by operating activities which included one-time payments of approximately $11 million related to litigation settlements, $5.3 million or non-recurring expenses related to the merger agreement and another $6.1 million payment of token related antitrust funds. Our accrual for these token related antitrust funds now stands at $19.7 million. Our net debt was $103.3 million at quarter end. We continue to have a strong balance sheet that provides a significant financial flexibility. Now I will turn the call back over to Bill to comment on the business groups.

[Bill Lowe:]

Thank you, Greg. So, let’s take a look at our business groups starting with the Solid Capacitor group. Solid Capacitor’s revenue was $34.8 million lower or down 14.6% versus the same quarter last year. And if you look at the two Solid Capacitor product lines, the revenue for the ceramic product line decreased $7.2 million or 7.6% versus the same quarter the previous year. Ceramic revenue decreased in the distribution channel and increased in direct channels, the OEM and EMS while regionally Europe and America decreased and Asia showing a positive increase compared to the same quarter a year ago. The increases were driven by product mix and a favorable MLCC pricing. Segment’s showing growth is compared to the same quarter a year ago include defense and aerospace, industrial and medical. Our automotive segment grew in direct channels when compared to the same quarter a year ago and our focus for future growth in our ceramic products segments continues to be development, design and supply of ceramic capacitors requiring high performance, reliability based on more robust designs and materials. Many of these require larger sizes to handle high current and voltage power requirements. We said that previously we’re insulated but not immune from the global market dynamics because of our product focus and business model. We are forecasting reduced ceramic revenue for the upcoming quarter due to the general global market conditions that remain sluggish and specifically demand that has somewhat staggered or declined in an automotive and industrial markets because of tariffs [ph] or other global macroeconomic factors. We also plan on further reducing ceramics inventory within our distribution network. This quarter by shipping in lower volumes and our distributors partners will [indiscernible] our customers to help balance out the inventory in a channel. We saw a progress in the previous quarter, but anticipate further corrections will be necessary. Given the global market conditions we believe this is the right thing to do. Revenue for our tantalum product line decreased $27.6 million or 19.2% versus the same quarter last year. Commercial MnO2 products were down approximately $15 million and commercial polymer products were down approximately 14.2% or 15%. Both products were negatively impacted by a combination of excess inventory in the distribution channel and general softness in the telecom segment within EMS. Revenue for our specialty tantalum products increased $1.7 million year-over-year driven by strength in the military and medical segments. Our focus for future growth in our tantalum product remains on new product development, design and success for applications requiring higher frequencies, harsh environments, limited board space and enhanced audio quality. These application requirements cross many end segments including the tablet or PC, telecom and cloud computing, automotive and industrial. The Solid Capacitor business group gross margin decreased to 41.6% or 250 basis points lower than the same quarter last fiscal year. But I have to comment and go off my script for a second to say 41.6% is a fantastic gross margin that continues even while we have revenue that declines. These markets impacts were somewhat offset by continued focus on reoccurring cost out initiatives that we continue, yield improvement and alignment of our manufacturing cost structure with lower volumes. Looking forward into Q1, the backlog in tantalum is increasing driven by improving inventory picture for our polymer products and distribution and a corresponding strengthening in order rates. Tantalum book-to-bill is approximately 1.15. Backlog in ceramics is approximately six months with more normalized lead times for all products. Ceramics book-to-bill is approximately 0.85. Our film and electrolytic business revenue was $42.9 million which was $7.3 million lower than the same quarter last fiscal year in 2019. Revenue slowed across distribution and OEM channels during the second quarter, across all regions driven by softening automotive market. Gross margin was 3% compared to 13.5% in the same quarter in the fiscal year of 2019. Decreasing volumes in the automotive market and the shift in product mix contributed to the lower margin in the third quarter. On a positive side, we’re seeing a growing number of opportunities coming from the electrification of vehicles as well as from the increase of worldwide investments into green energy. With the strong investments we’re putting in R&D we’re very well positioned for our future growth in all those key applications. The investments in R&D also include extension of product offerings on aluminum solid polymer and significant advances of the axial aluminum hybrid polymer technology. For the magnetic sensors and actuators business group revenue for the quarter came in $48 million which was $13.4 million lower in the same quarter and fiscal year 2019. The gross margin came in at 14.9% which was the decrease of 430 basis points year-over-year. The decrease was mainly driven by lower demand for our EMI flex suppression sheets primarily related to a slowdown on the smartphone market. We are experiencing a continued slowdown in demand for piezo actuator products using semiconductor production equipment consistent with the overall semiconductor market situation as well as specific customer 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 guidewire market. Additionally, we continue to see nice growth through the distribution channels as we develop and place more new products into the channel to position and grow our MSA longtail business, particularly new choke coil series named Metcom [ph] 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 that we have in place for the future as we expand MSA’s reach well beyond Japan and Asia in general. For the regions, Europe closed at $61.6 million which was 20.8% versus the same quarter last year. In distribution, POS came in at $42.7 million which was 10% decrease from the previous quarter and 19.4% decrease same quarter year-over-year. Our EMS OEM business has been almost flat quarter-over-quarter driven by the OEMs and slightly down year-over-year. The good performance has been driven from a large increase in our green energy customer base and by our industrial business while our automotive business, so a usual year end slowdown. Our distribution business has seen a steep decline quarter-over-quarter of 21% and 35% year-over-year. Distribution partners as well as POS customers are ordering less to correct their high inventories. We assume this trend continues on a lower level for the first half of calendar 2020. In the Americas, revenue closed at $64.4 million which was 19.3% decrease from last quarter and 29.6% decrease in the same quarter last year. The distribution business continues to soften last quarter was down 10.2% and down 32.2% from a year ago. We do expect that channel to be down this quarter as the inventory correction continues. Our OEM business was down quarter-over-quarter by 25.2% but up 9% versus a year ago. The EMS channel was down 26.2% quarter-over-quarter and down 33.9% versus a year ago. The decreased numbers were driven by excess inventory and reduced requirements for some of our networking customers. We do expect the OEM EMS business in the Americas to flatten out this current quarter and our POS business was down slightly quarter-over-quarter though our expectations as just flattened that this will flatten out this quarter as well. Asia closed at $127 million which was 4.3% decrease from the prior quarter and 4.5% down compared to the same quarter last year. POS came in strong at $60.7 million. Increased by 2% from the prior quarter and up 12% from the same quarter last year. The market splash in Asia however we do see signs of recovery in some of these segments as China continues to drive 5G, IoT and enterprise storages. Booking from SSD and servers remain positive. Book-to-bill ratio at our distribution channels is increasing steadily while their inventory levels continues to drop. We’re hoping that the trade deal assigned between US and China will also help consumer confidences and PMI readings in China. Pipeline is solid in Asia and the team will continue to build a larger customer base with the focus on POS sales and new design ends. Our Q3 revenues for Japan and Korea closed at $42.3 million which was a decrease of 6.6% versus the prior quarter and a decrease of 13.1% year-over-year. the demand for the automotive segment remained low as did demand in our consumer segment related to notebook, PCs and LCD TVs. Alternatively demand for products used in medical remained strong and demand for products used in semiconductor related equipment segment started to improve and the distribution channel POS reached $3.4 million an increase of 36% from the previous quarter and year-over-year. Regional book-to-bill show significant improvement coming in at 1

[Greg Thompson:]

Thanks Bill. So before talking about our outlook I want to reiterate what Bill said about the Coronavirus outbreak and our priority being safety and well-being of our employees, our customers and our suppliers. From a business standpoint, it is still too early to gage a full impact as the situation is still evolving. Our outlook that I’m about to cover takes in consideration the estimated business disruption for the current extended Chinese New Year’s holiday. But beyond that, we have little visibility and therefore cannot speculate on the impact to the business. All that said, we expect our fourth quarter sales to be in the range of $275 million to $288 million down approximately 19% to 23% from last year’s third quarter and sequentially down 2.3% to 6.7%. The lower revenue number reflects the continuing distribution channel correction which Bill discussed. That said, we believe our gross margin will continue to be relatively strong and reflect a positive impact from our structural changes and we expect non-GAAP gross margin to remain between around 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 fourth quarter and full year non-GAAP effective tax rate to be in the range of 29% to 33%. Now I’ll turn the call back to Bill for some final remarks.

[Bill Lowe:]

Thanks Greg. Clearly, we need to work through the impact of the Coronavirus over the next few months and continue to do our part to control its spread both within China and the world. KEMET will be doing its part within our facilities and also keeping our employees as safe as possible around the globe through our internal policies. We believe the industry itself has an underlying strength that will show resilience to the current disruption we’re now experiencing in China, the uptick that we expect in the coming cycle driven by 5G and the resurgence of new cell phone requirements will provide opportunities and again create a supply-demand squeeze on our large case ceramics, as small case size producers gobble up their capacity to serve the consumer market demand. We remain focused to complete our expansion in our ceramics business so we’re not slowing down our efforts to be prepared to capture that growth immediately when it presents itself. Of course I also wish to thank all of our employees around the globe who develop these new technologies that produce or support our quality products that make it all possible and I especially wish to thank our employees that have provided assistance to our China locations with special thanks to our Japanese employees and our Italian purchasing team that have provided thousands of mask to our China locations just recently. Operator, we’re now prepared to take questions.

[Operator:]

[Operator Instructions] your first question comes from the line of Craig Ellis from B. Riley FBR. Sir your line is now live.

[Q – Craig Ellis:]

Congratulations on navigating December’s choppy environment and the design wins you talked about emanating out of CES. My first question was really one on the fiscal fourth quarter revenue outlook, I’m hoping you can just give it some of the incremental positives and negatives as we look at trends one for the inventory reduction that hope to achieve in the channel how much of the first half inventory reduction would be completed exiting the quarter at the guidance midpoint and then if there are notable comments regarding either channels or products that would be helpful as well.

[Bill Lowe:]

Yes, let me address it I guess in a couple ways. One; let’s – putting aside the impact if there’s an impact from the China situation and the virus, any disruption there on going back to work dates. We started in the quarter in Q4 at about the same pace we started Q3 and so encouraged from that perspective that the pace which we were seeing ordering and potential shipments and what we would say, we have on the rock in other words booked to be able to ship this quarter would be in the high end of the range of our forecast. So we see that as a positive and that to your question that about the impact in inventories in that range, we would expect to see distribution inventories potentially decline somewhere between $8 million and $12 million which is a good drop for us, which would leave us with maybe just a little bit for adjustments in June we think to get to what might be a normalized level. So we’re trying to make good decisions about what we’re selling in, based upon what’s being sold out and still – if we end up in the mid of the range or in the high mid of the range for the revenue again borrowing an impact of China that could disrupt things, that where we would expect inventories to drop and that’s our goal. So, we think that would reflect only a small as Greg said in his remarks. At the current level, maybe 2.7% decline at the high end of the range so maybe it’s 3% to 3.5% decline quarter-over-quarter which considering all things I think is a pretty minor drop quarter-over-quarter absent again, absent what goes on with China. We’ve tried to bake in on the lower end of our range, but potential impact for China not knowing whether what, even if we come back to work on the 10th [ph], if everything actually gets out the door to our customers because they have the same issue, they’ve got to bring, they’ve got to start work, they have to bring back employees who left for the holiday and as we all know in China not everyone comes back to work so there is a rehiring of folks and that has to happen not just at KEMET, but it has to happen at our customers as well, but we’re encouraged about what we saw. As we rolled into the weeks, first week to January we were encouraged by our booking, by the book-to-bill and by what we were – asked to shipped during the quarter.

[Q – Craig Ellis:]

That’s helpful and certainly China is a very dynamic situation right now. I wanted to use my follow up with a question for Greg as we look at the gross margin guidance. Certainly, gross margins are hanging in quite well given the macro backdrop and the inventory reduction the company is trying to achieve in the quarter. as we look at the sequential change from December to March, can you just help us understand how much of that is related to pricing reset that typically take place around this time of year versus just the volume impact of what’s happening as you bring inventories down on hand and in the channel and as we work through that situation and if there are other factors, it will be helpful to quantify those as well.

[Greg Thompson:]

Craig, the pricing reset that would be a small amount in there for our fiscal fourth quarter, but also as you would know as we adjust on the distribution channel side, distribution revenues for us tend to be a little bit higher margin than other so from a mixed perspective it’s not quite as advantageous either. I’d say theirs is some other mixed changes in there as well and the reason we’re able to maintain those margins at that level is as we adjust our production capacity and take out cost and we continue to have some really meaningful cost reduction projects that offset some of those negative factors.

[Q – Craig Ellis:]

On that last point, Greg. Is it possible to probably just put some color on any further opportunities that would exists through the year or are things that can be done to reduce fixed cost really front end loaded in calendar 2020?

[Greg Thompson:]

It’s nothing new from what we have been doing over the last several years so it’s continuing the tantalum vertical integration initiatives. We’ve also given the pullback in ceramics demand in particular we’ve also had to reduce our labor force there a bit and then I would say, as we add capacity going forward for ceramics as we expect that business to pick up, we will do that really with – really just direct labor and fixed overhead and the variable fixed overhead cost will just get spread over more and more volume and so we would expect that would be a positive drive to our margins going forward. So again, nothing new in particular if all those initiatives that we continue to execute against like we’ve been talking about for few years now.

[Q – Craig Ellis:]

Thank you and lastly if I could, Bill thanks for giving us an update on some of the things that are happening from a regulatory and a process standpoint relative to the Yageo acquisition. My question is for those countries where we’re awaiting approval US, Mexico, Taiwan and China. I believe can you give us any update on how interaction is going with those entities. Anything that we should be focused on as it relates to closing out those approvals?

[Bill Lowe:]

No, nothing outside of the ordinary. We’re having the dialog that you would expect us to have where we’re answering questions and providing information. So, there’s nothing unusual that’s occurring. They’re on pace which were encouraged by that the contacts were all made relatively quickly after the filings and we’ve been providing the information they’ve been asking so, so nothing unusual, nothing to be concerned about to-date and we’re working through the process and we believe that the timeline is still the timeline that we put out originally is that sometime probably hopefully early in the second half of the calendar year, we’ll be able to wrap it up so nothings’ change in the timeline at this point.

[Q – Craig Ellis:]

Great, thanks for the help, team.

[Operator:]

[Operator Instructions] we have your next question coming from the line of Marco Rodriguez from Stonegate Capital Management. Sir your line is now live.

[Q – Marco Rodriguez:]

I apologize, I had some technical difficulties with my phone, so if you covered working capital accounts. Let me know and I can circle back around to the transcript. But just wondering, if you can talk a little bit more about on the balance sheet, inventory days. I’ve been kind of gumming up pretty steadily here throughout the fiscal year. Just trying to get a gage as far as what may be those drivers – what your expectations are as the quarter progressed here.

[Greg Thompson:]

Sure, so I would say now inventory has started to come down a little bit and I did mention in my prepared remarks that we expect it to come down further in the fourth quarter, but you’re right it has increased and let’s say, throughout the year it’s been three reasons probably firstly it’s related to the ceramics business and getting us balanced out as the demand there has softened, at least through the distribution channel and so we think we’ve got that at equilibrium now and have started to come down. After that the other reason that inventories had increased but again coming down as we had some really good buys [ph], we thought for tantalum ore at good prices and so short-term we bought more than we actually required, but it was at really good prices and so went ahead and did that. And then the other to a lesser extent drive or is in film and electrolytic as you recall we shut down our Granna, Sweden business and moved all of that productive capacity in electrolytic down to our Portugal, Évora facility and so we had to build inventories up there and most of that’s now worked off, but those things are all we’re working through that, we would expect some meaningful further reductions to inventory in the fourth quarter. But probably still more to go into fiscal year 2020 as well.

[Q – Marco Rodriguez:]

Got it, that’s helpful. And then, in terms of thinking about gross margins and the impact of that inventory kind of cycling through as we look into fiscal 2021, how should we be thinking about that sort of dynamic?

[Greg Thompson:]

Well, we haven’t put any guidance out and [indiscernible] unit the next quarter for fiscal year 2020, but I think you can see the confidence that we have in our general gross margin levels, now so the fourth quarter guidance 28% to 30% and so we’ve done – really the team I think has done a phenomenal job in some soft conditions that we’ve seen now for the second half of the year to keep those margins up at that kind of level, by offsetting some of that softness with meaningful cost reduction projects, the structural changes that we’ve talked about before and so we would expect more of the same of that going forward obviously subject to how the market and some of the growth starts to kick back in.

[Q – Marco Rodriguez:]

Got it, okay and then just lastly. I know this is a difficult question and a dynamic situation in China with the virus. Maybe if you can just kind of put some additional thoughts on how you guys were thinking about contingency aspects, if the shutdown is extended further into March for example what steps or what plans you might be able to put in place and how long, you’ll might be able to take the shipped capacity or how you might think it might impact the electronic supply chain.

[Bill Lowe:]

Yes, that’s a good question and we have the ability in some cases of course to shift capacity it doesn’t – nothing like that can happen necessarily overnight and in some cases, we wouldn’t be able to shift capacity from one facility to another based on equipment size of the product that we’re making larger cases versus smaller case in polymer for instance. But at the same time and I mentioned this in my remarks of course our customers there would be – a very large portion of what we produced in China stays in China and our customers will be affected the same way. I think the demand is still there. I think its amount of matter necessarily of lost revenue, it’s a matter of deferred revenue, so eyes there could be an impact if it was extended long in the March – not quantifying with that would be at the moment. I don’t think we’re expecting that, I mean at the moment it’s February 6th, turning comments from the region and the government is at February 10 date still holding, but yes if that were to take place there are some plans, we have to address that. Again, most of our customers will be facing the same thing. I think it’s a matter of deferral. It would cause disruption in the supply chain, there would be a lot of pent up demand behind the customers – it’s a ripple effect of course going from us to our customers, to their customers to the end demand especially if it’s in the consumer segments or if it’s an automotive for instance, will be a little different. So, it’s a task that we’re looking at to see how we would address it. At the moment, we have our fingers crossed February 10th date that they tell us is holding, continues to hold.

[Q – Marco Rodriguez:]

Thanks a lot for your help. Thank you, guys.

[Operator:]

Thank you. And we have your next question coming from the line of Pauline [indiscernible] from Argus. Please proceed.

[Unidentified Participant:]

You mentioned [indiscernible] inventory that you have build-up of ore and I just wanted to ask, what would be the time scale of ore [indiscernible] into the market for raw materials? And whether you foresee any increase in process on how that [indiscernible] later in the year?

[Bill Lowe:]

It would take several, the way our [indiscernible] works I’ll let Greg get into the detail of that. But when we buy ore let’s say in the December quarter or even a September quarter that adds to our inventory. Of course, it takes a while for that pricing to work through the income statement. So, we would expect to see benefit of that lower enrolment period if you will throughout the course of this next fiscal year. And of course, we’ll also continue to buy ore; it’s a continuous supply chain regarding that. But I don’t believe that we’re going to see any significant price increases on the raw material in ore, we’re not projecting that. As Greg – that we took advantage of situation where we can get it lower than we have been buying, so we took the opportunity and used some cash, so we had to do that. I don’t know, Greg if you want to make a comment about inventory accounting here but.

[Greg Thompson:]

Yes and I would say with that incremental ore that we bought, we would expect that to work off in the fourth quarter and so there’s a lot of tantalum ore that we have that we’re able to buy and so we will constantly look at where we think we can get the best, the best pricing available and so that will be dependent on the market demand overall. But I wouldn’t expect to see a big – a lot of our variability in our raw material cost as we go forward.

[Unidentified Participant:]

Thank you very much. An additional question I wanted to ask you, is just on the merger with the Yageo proceeding. What is your timescale assist and now do you expect any delay in US approval particularly security related checks for your business?

[Greg Thompson:]

No, we’re not expecting any delays, we’re still sticking to our time table of the closing in the second half of the calendar year, regarding at least the Hart-Scott-Rodino filing in the United States that’s already been approved, that timeframe has expired and therefore it’s approved. As well as Austria and Germany, so we’re working through the filings with the other jurisdictions there is nothing out of the ordinary that’s taking place and we’re still I believe that our timetable will be published earlier which is the closing in the second half of the calendar year as I said, is unchanged.

[Unidentified Participant:]

Thank you very much.

[Bill Lowe:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] there are no further questions at this time. You may continue.

[Richard Vatinelle:]

Okay, if we have no further questions operator then we’ll conclude the call and we appreciate everyone who’s been on the call this morning and asking questions. Thank you very much and we’ll talk to you next quarter. Thank you.

[Operator:]

Thank you everyone for participating. This concludes today’s conference. You may now disconnect. Have a lovely day.