KraneShares Dynamic Emerging Markets Strategy ETF
Q1 2019 Earnings Call Transcript

Published: 25 Jul 2018

[Executives:]

Robin Blackwell - Vice President, Corporate Communications & Investor Relations Per Loof - Chief Executive Officer Bill Lowe - Executive Vice President and Chief Financial Officer

[Analysts:]

Matthew Sheerin - Stifel Nicolaus Josh Nichols - FBR Marco Rodriguez – Stonegate Capital

[Operator:]

Good morning, ladies and gentlemen. My name is Lance, and I will be your conference operator for today’s conference. At this time, I would like to welcome everyone to KEMET’s First Quarter Fiscal Year 2019 Earnings Conference Call. [Operator Instructions] I would like to introduce our host for today. Ms. Robin Blackwell, you may begin your conference.

[Robin Blackwell:]

Thank you Lance, and good morning everyone. This is Robin Blackwell. Welcome to KEMET’s conference call to discuss the financial results for the first quarter fiscal year 2019 which concluded on June 30, 2018. Joining me today on the call is Per Loof, Chief Executive Officer; and Bill Lowe, Executive Vice President and Chief Financial Officer. As a reminder to you, a presentation is available on the website, which will help you follow along in the financial portion of the discussion. Before we begin, we’d 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 expect, anticipate, believe, estimate and other variation of such words. 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 and 10-Qs and our registration filing statements for additional information on the risks and uncertainties. Now, I turn the call over to Per Loof.

[Per Loof:]

Thank you, Robin and good morning everyone. We started the fiscal year strong with mixed shipments and orders exceeding expectations as well as some new capacity coming online. This is the tenth consecutive quarter of revenue growth. Quarter-over-quarter and our view looking into the next quarter is that we could see another 2% to 4% revenue growth for the September quarter over June. As a result of this we have revised our full fiscal year revenue growth forecast over the last fiscal year to arrange of 11% to 13% up from 4% to 6%. We continue to believe that this is a market trend which has been further impacted by various actions taken by competitors resulting in even higher demand for our products. Global markets showed continued strength in all regions with solid performance in all segments. Global capacity constraints continue for many products types not just MLCC’s and as a result, we’re currently and increasingly involved in helping our customers manage potential line down situations. Revenue for the quarter was $327.6 million up 3% from our March quarter and up 19.6% compared to Q1 last year. GAAP gross margin was strong at 28.9%, non-GAAP came in at 29.4% up 130 basis points from last quarter and up 220 basis points from a year ago. EPS improved strongly in the quarter as well. GAAP diluted EPS of $0.60 and non-GAAP diluted EPS of $0.55 up $0.11 compared to last quarter and up $0.22 from a year ago. Bill will go in a more detail, but all in a strong quarter and we firmly believe that Q2 will be our 11th quarter of consecutive growth. July 6 was the effective date of the United States government impose tax on particular goods imported from China into the United States. Some of the electronic components which KEMET produces in China are on the list of goods effective. We have coordinated participation between the business groups sales, distribution, supply chain, logistics and IT in our company. We have put systems in place to ensure compliance and these systems are consistent with the direction given by the Electronic Components Industry Association and that of our major distributors. We have also communicated the procedure and requirements with the effected customers. We will pass entire cost onto our direct customers and distributors which will be reflected as a line item on the invoice. We have experience no push back and have already begun to receive such payments. The products we export from China to the United Stated are Film products from Anting, Tantalum Polymer from Suzhou and Magnetic, Sensors and Actuators from Chowmin [ph]. In the event, this situation is not expeditiously resolved we’re looking into alternative locations to move production heading to the US out of China. Options currently under consideration are moving US designated magnetic and sensors production from Chowmin [indiscernible] China, Ho Chi Minh City, Vietnam and Tantalum Polymer from Suzhou, China to Victoria, Mexico and or Bangkok, Thailand. And Film products from Anting, China to Bulgaria and Macedonia. We have notified our distribution partners of price increases as per the terms of our contract. This quarter the effect is quite minimal, but will be furthered in over the coming periods and we’ll realize the full effect of this increases in quarter one of next calendar year. The negotiation season is just beginning with OEMs and pricing in volume are of course part of that conversation as well. Regarding supply and demand, the multi-layered ceramic capacitor shortage has become more severe since last quarter and we expect this tightness to continue for at least another 12 months. Currently there is a 500 billion piece under supply in our view. Everyone one billion piece is added requires an investment of $6 million to $7 million so to catch up with a current demand requires $3 billion in CapEx expenditures. We continue to deliver in our commitments with existing customers where other suppliers have de-committed. We respect the contracts and we live up to our promises. We can’t deliver more, but we’re delivering what we have promised and we’re dealing with 160 expedited request per day, about 20 per hour. In this environment we have difficult to supporting new customers whose needs were not included in our forecast. Our on-time delivery is about 99%. This is who we are as a company, we live up to our agreement and we do not de-commit capacity. The industry seems to be adding capacity in a measured and reasonable manner. As capacity begins to come online at the end of this calendar year and into 2019, we might see a softening of the over demand but not to the degree of easing of the constraint. Additionally, there is a lack of clarity as to when the capacity for the industry as a whole will actually come online due to testing and qualification times. Many variables will impact the depth and breadth of the shortage such as future growth demands, cost and the speed which additionally capacity will be available. The planned capacity increases, the industry is installing will come close to the demand of today, but not the demand of tomorrow and these capacity increase are lagging 18 months behind the demand. For example from 2010 to 2015 piece count in MLCC’s grew 5% to 7% annually. In 2016 and 2017 piece count grew 12% to 17% depending upon the case size. If demand continues to grow and it has over the last few years, we’re looking at supply constraints for some time to come. Another example exacerbating the situation is that there are some larger case sizes with some of our Japanese competitors are no longer offering. This is actually beneficial for KEMET as these products are in our sweet spot. But we’re small player, 1% of the piece count and 3.5% of the revenue. As a result of all this however, we may add more capacity than originally planned. And we now see customers looking for alternative solutions. One such solution in certain applications is tan [ph] limit particularly Tantalum Polymer. However, there isn’t enough Tantalum capacity to fill the current supply gap in ceramics and not in all the sciences is another dielectric solution suitable. This is long-term to science strategy issue. Currently we have clear visibility into the present and immediate future needs of our distribution partners and direct customers. But with the EMS the picture is a little bit more clouded. Some of the end user supply through the EMS channel [indiscernible] and come prepared to support because we’re part of the discussions. There are however several large EMS customers where we do not have visibility of the end user demand and this makes the task of supporting the current and future needs difficult. We are in discussion with our EMS customers to determine solutions to align our support with their needs. Furthermore, we’re in substantive conversations with several customers who are asking us to supply significant levels of capacity. This is another additional variable driving our investment strategy. We’re also looking at what steps are necessary to ensure that customers will take the capacity we will produce further. A manifestation of the supply gap with OEM customers with whom we typically negotiate contract the earlier [indiscernible] yearly and due to typically ASP declines are now asking for longer term contracts. Material sciences; investing in the passive component businesses is more than just a large capital investment. It is a lot easier to add people to a production line than it is to have chemical engineers in the lab inventing the next generation of products. The complicated material science aspect of this business might surprise those who are not familiar with this. Our closest ceramic manufacturing location is not Monterrey, Mexico and we’re considering having Investor Day there, so that investor can understand the waiting requirements of entering this business. TOKIN integration; the integration of TOKIN is ongoing and evolving actually better than expected. The TOKIN products are now available and on our digital platform and cross selling is happening in key accounts across the globe. We recently held a Japanese sales agent conference where we had conversations with the leadership of these companies and they unanimously expressed interest in selling the KEMET legacy parts to their customers throughout Japan and Korea where KEMET legacy has had very little presence prior to the integration. Material costs; our material costs are stable due to the Tantalum vertical integration and agreements we have in place with our mineral suppliers on pricing. In foil and film, we are focused on restructuring and material cost reduction and are investigation co-development opportunity. With that, I’ll hand over the call to Bill. Bill?

[Bill Lowe:]

Thank you, Per and good morning, everyone and as usual I’ll start my review on Slide 3, if you’re following along on the website. And as Per said net sales for the quarter were $327.6 million which was up 3% compared to the prior quarter of $318.1 million. GAAP net income was $35.2 million and our non-GAAP adjusted net income was $32.5 million in the current quarter compared to $220.4 million and $19.1 million respectively in the same quarter in the prior period. Our GAAP gross margin percentage improved by 180 basis points from 27.1% in the same quarter in the prior year to 28.9% in the current quarter. Non-GAAP gross margin in this quarter was slightly higher at 29.4%. Our adjusted EBITDA for the quarter was $56.2 million an increase of 29.6% from $43.3 million in the same period in the prior year. The LTM adjusted margins through though have steadily increased from 13.6% to 16.3% since December 31, 2016. You can find those details on Slide 7. For the quarter, our non-GAAP net income was $0.57 per basic share and $0.55 per diluted share. Now turning to Slide 4, our non-GAAP SG&A expenses were in line with our forecast at $42.2 million and were down compared to the $43.8 million in the prior quarter. Our expectation for this next quarter is in a similar range of $42 million to $43 million. Taxes this quarter were $4.6 million [ph] which was up related to the forecast driven by the mix of additional taxable income this quarter. Next quarter we expect taxes to range between $3 million and $4 million. Although revenue will be up again next quarter, we expect to mix three more in the US and Japan where we have NOLs which will minimize the taxes. Regarding tax reform, the company is still working to determine the impact of the toll [ph] tax but we expect to offset this tax for the NOL versus paying cash over the eight-year period as allowed by the new law. Moving to Slide 8 in capital expenditures; capital expenditures during the quarter were $16 million compared to $34.1 million in the prior quarter. We are a little behind in our capital spin rate but we’ll catch up as we go through the fiscal year. This coming quarter we expect to spend in the range to $20 million to $30 million and as we stated in our last earning’s call, we expect our capital expenditures including IT and corporate spending related to the TOKIN acquisition for the full year ended March 2019 to be in the $80 million to $100 million range. It is possible based upon where we see the market continue to trend as Per mentioned earlier that we may increase this a bit. If we do, we’ll let you know that after our second quarter. We finished the quarter with a cash balance of $244.6 million and as we stated previously in our last call, we knew this quarter we were not going build cash as we paid approximately $30 million against the TOKIN accrual or the antitrust liabilities on top of the $16 million CapEx and some other one-time payments related to the restructuring in Europe and Japan and performance incentives. The TOKIN antitrust accrual now stands a reduced amount of $48.2 million as of June 30. During this quarter, we also paid $4.3 million towards reducing our term loan in accordance with our amortization schedule. Our total debt now stands at $320.2 million versus $324.6 million at the beginning of the fiscal year. And referring to our debt and refinancing, we’ve said for quite a while now that we would like to exhaust our ability for TOKIN to accept the Japanese bank market before refinancing in the US. We are currently working with the bank in Japan and expect to have a conclusion in the next 60 days or so. Of course we’re hopeful for our successful conclusion but it is still too early to call. Now I’ll turn the call back over to Per. Per?

[Per Loof:]

Thank you, Bill. You can follow along on Slides 13 to 17 in the presentation deck during this section. Turning to our business groups, solid capacitors revenue increased to $11 million as compared to the prior quarter were approximately 5.4% to $213.8 million. The total revenue increased was significantly impacted by continued strength in the distribution and incremental growth in the OEM and EMS channels. Gross margin in the first quarter was 37.2% an improvement of 20 basis points over the prior quarter. This result was driven by improving cost performance and a favorable mix. Order rates continue to be robust and we entered this quarter with a solid backlog and expect to see revenue increase over the first quarter performance. On a year-over-year basis, first quarter 2019 revenue increased $31.7 million as compared to the same quarter at fiscal 2018 were approximately 17.4%. the revenue increase was impacted by additional net sales of a full quarter of TOKIN acquisition revenue continued strength of our legacy products and distribution channel across all regions and an incremental increase in the OEM channel. Gross margin percentage improved 300 basis points year-over-year and driven by continued improvements in manufacturing performance impacted by our annual cost down initiatives, favorable product mix and of course the TOKIN acquisition. Our Film and Electrolytic business revenue was $55 million in line with the prior quarter and $7.5 million higher than the quarter ended June 30, 2017. Revenue remained strong both in industry channel and OEM customers and the EMEA region revenue increased offsetting lower demand by Asia, OEM customers. Gross margin was 6.2% compared to 5.4% in the previous quarter. Improving manufacturing performance as a capacity utilization contributed to the better margin in the first quarter. For the Magnetic, Sensors and Actuators business group revenue for the quarter came in at $58.8 million as compared to $60.3 million in the previous quarter and up $14.5 million from last quarter’s ended June 30, 2017. Gross margin at 20% was an increase of 310 basis points from the prior quarter. This increase was a result of a number of factors which include favorable product mix and broad market stability led by an increase in demand for noise suppression sheets continued stability in the demand for PSO Actuators used in semiconductor equipment and PSO product, used in smart metering as well as antennas for use in gaming consoles. Now to the regions, Europe closed with $74.6 million which was down 1.7% versus last quarter, but up 12.3% compared to the same quarter last year. While our distributor [ph] business has been slightly down due to capacity constraints, our EMS and OEM business has been slightly up. POS closed to very strong at $54.5 million at 1.2% increase from the prior quarter and at 31.2% same quarter year-over-year. Distribution inventory is down by 6% this quarter versus last and we continue to see strong markets across Europe. The automotive market is facing an increased demand especially coming from 48-volt application and in the industrial area, factory automation, green energy and smart metering are driving our growth. In Americas, revenue closed to $72.7 million of 7.4% increase from the previous quarter and a 12.4% increase from compared to the same quarter last year. Demand continues to be driven across all segments and all channels. It was also another strong quarter for POS which was up 19.8% compared to the previous quarter and 41.3% compared to the same quarter last year. This was the seventh consecutive quarter of growth with our channel partners in the Americas. Book-to-bill remains positive and strong overall. It was a good quarter for Asia, revenue closed to $133 million up 11% from the prior quarter and 23.8% compared to the same quarter last year. POS was at $67.7 million up 17.7% from the prior quarter and up 56% compared to the same quarter last year. The market remains strong in Asia and Book-to-bill ratio remains positive at 1.3. We continue to see strong demand in automotive and consumer customers in Asia and as we expand our customer base, we find good opportunities for cross selling. The Asia team will continue to drive POS growth with a focus [indiscernible] of specialty capabilities. Q1 revenues for Japan and Korea, our fourth region closed at 47.3%, a decrease of 13.5% versus the prior quarter and an increase of 33.5% compared to the same quarter last year. The region was down mostly due to our EMI test chamber business which followed this typical seasonality pattern with a strong Q4 followed by much softer Q1. Book-to-bill remain positive with continued strong demand in the automotive and semiconductor manufacturing equipment market segment. It was also another strong quarter for POS which is up 12.3% compared to the prior quarter at 41.2% compared to the same quarter last year. As I indicated our distribution business produced another strong quarter globally, with POS and POA at direct levels. POS on a global basis was up 13.3% compared to last quarter at $183 million and 44% as compared to Q1 fiscal 2018. This is the seventh consecutive quarter of growth with our channel partner globally. POA increased 6.4% quarter-over-quarter to $137 million and up 19.4% compared to the same quarter last year. Book-to-bill is strong both in the in the distribution and EMS channels. All healthy signs. Inventory in the distribution channel dropped 1% to $142 million compared to Q4, fiscal 2018. We continue to drive POS growth with our channel partners while maintaining a balanced inventory and revenue patterns. The focus during this time with extended lead times is to ensure that our partners do not try to overstock and then we help them focus our investment on components that are in high demand. Lastly, let’s have a look at our performance by market segment. On a percentage of revenue basis, the computer and defense segments show an increase at 21% and 5% respectively. The telecommunications, consumer, automotive and medical segments remain stable at 13%, 14%, 16% and 5% respectively. The industrial segment at 26% was slightly down compared to last quarter. You can find these percentages on Slide 16. So now to our forecast, based on the pace of the market. ASPs and the increasing capacity capabilities, we’re actually increasing our annual revenue forecast to the range of 11% to 13% increase over the prior fiscal year. This is up from our original forecast of 4% to 6% growth slightly more actually double slightly more than double our original forecast. Margins should also improve moving up as well to a range of 29% to 31%. SG&A will slightly increase driven largely by sales incentive plans to a range of $42 million to $44 million per quarter. We’re still planning to ramp up our new spend approximately 25% this year to around $11 million to $12 million per quarter as we get to the back half of this fiscal year. Taxes will also [indiscernible] increase and be approximately $3 million to $4 million for the quarter. Now finally for the upcoming quarter ending September 30, we expect sales to be in the range of $330 million to $340 million. Non-GAAP gross margins to be between 29.5% to 30.5%, SG&A between $43 million to $44 million. R&D in the range of $10.5 million to $11.5 million and taxes of approximately $3.5 million to $4 million. Operator, this concludes our prepared comments and we’ll be happy to respond to any of the questions.

[Operator:]

[Operator Instructions] your first question comes from the line of Matthew Sheerin from Stifel. Your line is open.

[Matthew Sheerin:]

So just a question, well couple of questions. Just regarding the guidance with the growth margin. First on the revenue side, my understanding that you’re pretty much completely filled in your factories [ph] right now for the solid capacitors. So where’s that extra revenue? Are you able to squeeze more revenue is pricing built into that and second part of that question is, is on the gross margin is that more of a reflection of better pricing or mix?

[A – Per Loof:]

As you understand we’re pretty full, but we’re going to start to see pricing play some bit of a role this quarter and also we’re as we’re adding capacity this year and some of this is going to come on in this quarter, so a combination of that. Also we are expecting better yield performance to continue, so ability to have better performance in the plans. Little bit on the mix, some pricing effect and also capacity coming online is actually contributing to our view that we can do a little bit more.

[Matthew Sheerin:]

Okay and could you be more specific on the capacity adds from this quarter and as you get through the fiscal year in terms of what you’re expecting because I know that, there’s some bottlenecks in terms of getting the equipment but also you have to qualify customer. So can you just walk us through that process and what we’re looking at in terms of incremental capacity?

[A – Per Loof:]

We said that we will add by the end of this year, we will have added another $100 million of run rate revenue due to the increase in capacity that we’re putting in place. However with the favorable ASP environment that number is going to be a little bit more and that’s also, that contributes to the fact that we now are increasing our view of the year. So we’re going to see the capacity that we have planned is going to come on and we knew about the constraints of the equipment when we put the plan in the place and we have not seen that deteriorate, it’s still extended of course but we know what they are, so I think we feel pretty good about what we’re going to see this quarter, we’re going to feel pretty good about what the year is going to come out and the fact that, the capacity we’re putting in place is also going to be filled up right away.

[Matthew Sheerin:]

Is that capacity pretty much sold if you will in terms of customer is saying, we want allocation on that?

[A – Per Loof:]

Yes, I think that’s a reasonable statement.

[Matthew Sheerin:]

Okay and obviously there’s still be given particularly the book-to-bill distribution of 1

[A – Per Loof:]

I don’t think there is much double booking going on and as you can see, we have decreasing inventories in the channel and so that just goes to show that nothing stays on the shelf and you can also say that, we look at our own inventory situation stuff once they’re built that flies up the door. So the demand situation is quite strong and I do not think it's double ordering. I think they would like to have more stock, but there just isn’t the capacity that will put more stocks on the shelves. I would actually disagree with you some, that the double ordering is significant.

[Matthew Sheerin:]

Well when the book-to-bill is 1.8, it seems like there is pretty robust ordering going on, obviously through the channel.

[A – Per Loof:]

But there is also 500 billion piece deficit in terms of overall capacity [indiscernible]. So you would expect that to be.

[Matthew Sheerin:]

Fair enough. And then just on the pricing is that, are you going to – because I know your earlier commentary in previous quarters has been that, on the direct particularly like auto customers, you’re locked into contracts whereas through distribution you can increase pricing. So are you going to direct customers now and seeing better pricing.

[A – Per Loof:]

We’re doing a couple things on the distribution channel. We have contracts with them as well. So when we do increase prices which we are doing as we speak it takes a while for that to be effective. When it comes to the contracts with the OEMs those typically come on, become negotiable right as we speak. So the fall season is basically when those happened and yes there will be increases and prices for the OEM channel as well.

[Matthew Sheerin:]

And that’s reflective in your [indiscernible].

[A – Per Loof:]

From when they will hit the P&L is in January. And what we’re saying is, we are going to live up to all our contracts. We’re not canceling anything, if we have agreed to a contract, we will live by that contract. On time delivery is over 99%, we proud ourselves on ensuring that what we promise to deliver, we do deliver but of course we’re constrained and can’t actually increase that much. The customers want more and we can’t actually do more.

[Matthew Sheerin:]

Okay, thanks Per. Appreciated.

[Operator:]

Your next question comes from the line of Josh Nichols from FBR. Your line is open.

[Q –Josh Nichols:]

I was going to ask, you talked about doing a refi ideally in Japan potentially, but what are the plans for the company’s cash. You don’t have very much debt, would you be looking to do refi but potentially downsize the loan size or how should we think about that as, as the cash balances.

[A – Per Loof:]

Bill you want to take that.

[Bill Lowe:]

Yes, I think you can, you will probably see us do have little less debt and so we’ll use some cash to probably take our balance down. The management team and the Board’s evaluating other options that we would talk you about later when those decisions are made as to what other alternatives we might think we should use the cash. So I think a lot of that is in the mix and I think, if more than likely you’ll hear more from us about that as we conclude our September quarter because we’ll have all that kind of wrapped up. One thing kind of leads to another, so I think if you hang on and wait for the second quarter. I think we’ll have a lot. I hope that we’ll have a lot to talk about.

[Q –Josh Nichols:]

Yes, I mean operational performance is definitely been strong, so some opportunities on the debt refi front. I guess another way to just frame it, I guess how much cash on the balance sheet are you comfortable with having us. Is there like a minimum threshold that you plan on keeping or?

[A – Per Loof:]

Bill and I have different of opinion. I think we can do with less than Bill would like, but I mean it’s less than $100 million. You could I think you have to distinguish between what’s the bare minimum you can run on, which is not really necessarily a right way to run a company to have the bare minimum cash in good times because when things turn a little bit south from a global perspective you need a little more cushion there. So you don’t want to run at your minimum level that you can run out in good times. So I think, that’s why Per [ph] and I have a little bit difference. It’s the definition of that. Really, what you could really run at? Yes you could run quite a bit lower, if you needed to, but the question is, should you do that when times are good because when they’re bad then you need a little more cushion there to have the ability to take a change at opportunities during those times that would put you in a better position as global economy comes out of it [indiscernible].

[Bill Lowe:]

I think we’ll have a good picture. I do think we’ll have a conclusion as to whether we’re successful in Japan by the time we talk next, that and of course, if not we’ll refinance in the US, but our hopes are that we finance in Japan and I think that will drive us here to make other decisions that will be ought to communicate to you at the same time. So I think it's one quarter away for you to know, to get more detailed answers to that question.

[Q –Josh Nichols:]

Thanks that’s helpful and then I was going to ask, just to hit on a point that you were talking about earlier. So significant jump in the revenue growth rate guidance for this year 11% to 13%, could you help meet frame this what percentage of that growth rate is really attributable more towards volume versus pricing because you do have some of the chunk [ph] capacity coming online?

[A – Per Loof:]

As a majority of this because in the pricing well actually not come online fully until the first calendar quarter next year. OEM pricing will not increase until that time because that’s when the contracts expire and also even the [indiscernible] price increases will come on gradually, but will not come into full effect until the first part of next year. So the majority of this increase is actually capacity coming online and our ability to get more out of our factories, which of course we always try. So pricing plays a role and we’ll play a bigger role in 2019. But this is really capacity coming online for the most part.

[Q –Josh Nichols:]

And there’s been a lot of news out about the constraints globally for capacitors in this market. Can you talk a little bit about lead times what you’re seeing for some of the different product areas and kind of the trend and how you expect that to kind of play out?

[A – Per Loof:]

Well I mean, it’s said that we’re going to – the world is going add about 10% or so more capacity which basically takes care of the demand we see today, but it’s going to take 12 to 18 months to put that in place. And assuming that, there’s some increase in demand that we’ve seen over the last two years which has been 12% to 17%. Of course that’s not going to be taken care of through this, so we can see the constraints here being quite lengthy and our backlog is ceramics is a year, basically and the reason it’s not more than a year is we actually don’t accept orders that are longer. We don’t put books, we don’t put orders on our books if they’re more than a year out.

[Q –Josh Nichols:]

Great and then just looking at last thing. I was going to hit on is, kind of the margin profile, so it looks like at the midpoint here for the year you expect to kind of hit that 30% margin level. What would it have to happen, is there room for that to move up or what would have to happen to get materially above the 30% gross margin level given what’s going on in the market say [ph]?

[A – Per Loof:]

I think pricing of course is helpful across the board. I think that we’re going to see margin improvement Film and Electrolytics and we’re going to see margin improvements in Magnetic, Sensors and Actuators which will contribute to that as well. So I think there are – we have predicted 29% to 31% for the year in margin, but if the market continues to behave as it is now, we kind of believe it will for some time, yes you can see that margin improve even further.

[Q –Josh Nichols:]

Thanks guys. I’ll pass it on.

[Operator:]

[Operator Instructions] your next question comes from the line of Marco Rodriguez from Stonegate Capital. Your line is open.

[Marco Rodriguez:]

Just couple quick follow ups here, just wanted to talk a little bit more about the increasing guidance and make sure I’m kind of following stuff here. Obviously we’re little over doubling the growth rate for the annual revenue for fiscal 2019 and if I’m hearing you correctly, the main driver for that is the additional capacity you’re bringing online and then, some better manufacturing yields there. I’m just trying to understand a little bit because it doesn’t sound like the capacity adds that you’re putting into your guidance has changed since you discussed that in the last couple of calls. So it would almost seem to imply to me that this is all coming from yields or are we accelerating in some fashion, the capacity adds?

[A – Per Loof:]

We’re actually little ahead of schedule in terms of having the capacity coming online and we’ve actually seen some better performance in our plans, more than we had actually thought at the beginning of the year, so that is added to that and also pricing of course is helping as well. So pricing both the fact that we always anticipated there will be some ASP declines we’re not seeing any of that at this point and we’re going to see some increasing prices which helps, so I think the mix of that lends us to believe that, we need to increase our forecast to the levels, we just put out.

[Marco Rodriguez:]

Okay and the pricing increases. I mean you’ve explained here that, with the end customers most of the pricing is really going to come into full factor in fiscal 2020, but obviously you’ve got some tariff cost that you’re passing on as well. Can you kind of help me understand how those are impacting fiscal 2019 numbers?

[A – Per Loof:]

First of all the tariffs are not that larger for us, we’re not importing all that much from China into the US, but also we’re passing that on. And then the pricing there will be some pricing improvement or some pricing effects in this quarter that will be more in Q3 and even more in Q4, so the pricing is and of course that’s all, that goes straight down to net income as we can understand, so it has a huge impact on the performance of the company as well as of course adding to the revenue growth. So there is some pricing effect and there is some better performance in the plan and also we’re seeing an improvement in mix which we shouldn’t disregard as well. So the better mix performance, better yields, pricing and capacity coming online faster than we had in our plan, that’s why we’re increasing our forecast.

[Marco Rodriguez:]

Got you. And the mixed increases you’re seeing you’re kind of forecasting, are baked into your assumptions for fiscal 2019? Are there any particular areas that are driving that for you guys?

[A – Per Loof:]

Well I think the situation we’re in of course gives us, more opportunities to focus on a better mix as well. So you know given a choice of course we would like to improve our mix and the credit market situation gives [indiscernible].

[Marco Rodriguez:]

Got you and then on the CapEx spend for the additional capacity that you’re adding here. Can you kind of help us a little bit better in terms of the cadence per quarter as far as how that spend is going to transpire?

[A – Per Loof:]

Bill mentioned we will spend $30 million.

[Bill Lowe:]

$20 million.

[A – Per Loof:]

$20 million to $30 million this quarter and that’s going to probably while we’re going to see over the next several quarters in that range.

[Marco Rodriguez:]

Got you. And then last quick question just kind of housekeeping item. Looking at your press release, I noticed you had some sort of what was the call day, R&D grant reimbursement. Can you talk a little bit about that and was that in the other below the line, if you will?

[A – Per Loof:]

It’s below the line Marco, it was grant reimbursement TOKIN project, the TOKIN have been involved with for quite a while with the Japanese government and that grant was basically forgiven to be paid back, so it’s another income item on the gap books below the operating line.

[Bill Lowe:]

That’s not in the non-GAAP.

[A – Per Loof:]

And it’s not in the non-GAAP number.

[Bill Lowe:]

But that contributed to the reason why the GAAP number is actually number is higher than the non-GAAP.

[A – Per Loof:]

Correct.

[Marco Rodriguez:]

Right, got it. Thanks a lot guys. Appreciated your time.

[Operator:]

[Operator Instructions].

[Bill Lowe:]

Operator, if there are no other questions then we can.

[Per Loof:]

If there are no other questions, really appreciate all being on the call today. We’re having a beautiful day in Florida and hope you’re having a beautiful day wherever you are. So thank you all very much and thank you for your interest in our company. And have a great day.

[Operator:]

Thank you for joining. This concludes today’s conference. You may now disconnect.