KraneShares Dynamic Emerging Markets Strategy ETF
Q3 2018 Earnings Call Transcript

Published: 1 Feb 2018

[Executives:]

Per Loof - Chief Executive Officer Bill Lowe - Executive Vice President, Chief Financial Officer Robin Blackwell - VP, Corporate Communications and IR

[Analysts:]

Josh Nichols - B. Riley & Co. Matt Sheerin - Stifel Nicolaus Marco Rodriguez - Stonegate Capital

[Robin Blackwell:]

Thank you Charles and good morning everyone. This is Robin Blackwell. Welcome to KEMET's conference call to discuss the financial results for the third quarter fiscal year 2018 ending December 31, 2017. 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 expects, anticipates, plan, intend, 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'll turn the call over to Per.

[Per Loof:]

Thank you, Robin and good morning everyone. It’s been a strong quarter for KEMET, better than expected. Revenue for this quarter was $306.4 million up 1.6% over the prior quarter. Referring to slide six and seven in the web slide deck, sales at $306.4 million for the quarter versus the year ago were up 63% from $188 million. On a pro forma basis including the acquisition of TOKIN, sales were up 16.4% from $263.3 million versus a year ago. Gross margins were 30.2% up 200 basis points from Q2 and up 490 basis points from a year ago. EPS fully diluted and on a GAAP basis was $0.32 up $0.10 from last year. Non-GAAP basis came in at $0.52, up $0.07 from last quarter and up $0.41 from a year ago. As you may recall we forecasted revenue down in Q3 due to the normal Christmas closures, especially in the U.S. and Europe, which of course leads to the possibility that orders might not be able to be shipped. This year was different. The Christmas effect was not as pronounced as in previous years. In fact, we could have shipped more if we had had the capacity to do so. As Bill will discuss, we continue to generate cash and added $30.5 million of cash this quarter and we have generated $58.5 million in cash since July 1, raising the cash balance of $284.2 million at quarter end. This of course gives us additional degrees of freedom to invest in M&A, R&D and capacity. This was a well executed quarter. Because of strong cash flow generation and the need to further increase our capabilities in profitable markets, as we have previous announced, there will be an increase in CapEx by an additional $20 million, bringing the total CapEx spend to approximately $60 million this fiscal year. This will provide an overall combined capacity increase of 10% for the company. This increase is targeted in areas where demand is strong and where we are an approved supplier. Thus in MSA we are not increasing capacity in Magnetics, but are increasing in Sensors, Actuators and in materials. In Tantalum we are not increasing in MnO2, but are increasing capacity in Polymer. In the Film and Electrolytic group we are increasing capacity in actualitics and in our Film business for automotive customers. The increase in capacity will begin to be in place in late summer and will increase throughout next fiscal year, resulting in a run rate as we exit fiscal ’19, a year from now, with a potential of an additional $100 million in revenue. We continue to invest in capacity in fiscal ’19 as well of course. This morning we made two announcements regarding M&A. We made a $5 million investment in Novasentis, a leading developer of film based haptic actuators. Novasentis makes the worlds thinnest electromechanical polymer based actuators. In this venture Novasentis will supply its smart film and KEMET will apply expertise in manufacturing film capacitors in the development of production of these actuators. The Novasentis technology allows for unprecedented functionality in haptic actuators, both due to its ultra thin profile and the small size, which allows it to be incorporated into the widest variety of variables and virtual reality applications and of course its ability to provide a variety of tactile sensation. We have been working together with them since 2015, exploring new technologies and now with our combined capabilities this partnership has the potential to produce haptics like the industry has never seen before. KEMET will have a representation on the Novasentis Board of Directors. Also today we announced a joint venture with Jianghai Film Capacitor Company, a Chinese manufacturer of film and electrolytic capacitors and the formation of KEMET Jianghai Electronic Components located in Nantong, China. Each partner will provide initial capital contributions of $5 million through a combination of cash and manufacturing equipment and will be equally represented on the joint ventures board of directors. KEMET Jianghai Electronic Components will manufacture axial electrolytic capacitors and hybrid electric vehicle Film DC brick capacitors for distribution through both companies’ sales channels. KEMET’s technology leadership and Jianghai’s local presence we believe will yield Asia’s market benefits. In addition, we expect to realize cost savings by capitalizing on the strong buying power of Jianghai with their suppliers. As I said, this venture blends KEMET’s technological expertise in filmalitics with Jianghai’s manufacturing proficiencies which we expect will provide best in class, cost competitive film and electrolytic capacitors solutions for automotive and industrial customers, in particular in Asia. We continue to make advances down the roadmap for our digital strategies. This past quarter we released a new performance simulation application, supporting some of the products from our Magnetic’s business group and we will be releasing a third simulation application later this month. At the same time we advanced our CAD model support for more than 7 million of our skews and we are on pace to launch our Jet Stream project, the industry’s most intelligent and efficient coding platform during the second calendar quarter of this year. Now, I’ll turn over the call to Bill to discuss our financials.

[Bill Lowe:]

Thank you, Per and good morning everyone. I will begin my review on slide three if you are following along on the website. And as Per said, net sales for the quarter were $306.4 million, which is up 1.6% compared to the prior quarter of $301.5 million. GAAP net income was $18.6 million and our non-GAAP adjusted net income was $30.6 million compared to $5.8 million in the prior year. Our GAAP gross margin percentage grew by 490 basis points from 25.3% to 30.2% in the current quarter and the non-GAAP gross margin this quarter was just slightly higher at 30.3%. Our adjusted EBITDA for the quarter was $49.6 million, an increase of 84.7% from the $26.8 million in the prior year. Our non-GAAP net income was $0.54 per basic share and $0.52 per diluted share. The adjusted EBITDA decreased slightly from the prior quarters. Depreciation expense was affected by purchase accounting true-up related to the TOKIN acquisition. The adjusted EBITDA margin trend though has increased to 16.2% from 9.4% eleven quarters ago. Additionally LTM adjusted EBITDA margins have increased steadily from 13.6% to 15.8% since December 31, 2016 and these details can be found on Slide 8. Non-GAAP SG&A expense of $44.5 million was above our estimated range for the quarter and was up compared to the $38.9 million in the prior quarter, driven by several calendar year end accruals, mainly increases in performance related employee costs and of course selling expense was up as the portion is variable and is driven by sales volume. Our expectation for this next quarter for SG&A is in the range of $40 million to $42 million. Tax at this quarter were $2.1 million and we continue to forecast a range next quarter between $3.2 million and $3.8 million as this quarter has a minor effect from the tax reform bill. Regarding the tax reform, the company is still working to determine the impact of the toll tax, but we would estimate it at this time to be between $9 million and $12 million. However, we current have an NOL of approximately of $399 million and could choose to offset this tax with our NOL versus paying cash over an eight year period as allowed by the new law. We also revalued the tax benefit associated with the NOL and the offsetting valuation allowance to reflect the new lower corporate tax rate going forward, but it had no impact on our income statement. Let’s move to slide five. Capital expenditures during the quarter were $13.1 million compared to $10.5 million in the prior quarter. And as stated in our last earnings call, we expect capital expenditures as Per said earlier to be in the range of $50 million to $60 million this year. We finished the quarter with a cash balance of $284.2 million, quite a bit ahead of our forecast. During the quarter we did continue to pay our $4.3 million towards reducing our term loan in accordance with our amortization schedule, and as we mentioned in the past six months we will see an increase in demands on our cash related to the TOKIN liabilities that we paid during this next short period. Our total debt now stands at $328.2 million versus $388.2 million from the beginning of the fiscal year. Now, I’ll turn the call back over to Per.

[Per Loof:]

Thanks Bill. You can follow along on slides 15 to 18 in the presentation deck during this section. Excuse me; turning to our business group, the Solid Capacitors group, revenue as compared to the prior quarter increased $3.8 million or approximately 2%, to $195 million. The revenue increase was significantly impacted by continuous strength in the distribution channel, which was somewhat offset by a seasonal decrease in the EMS channel. Gross margins in the quarter was approximately 36.5%, an improvement of 180 basis points over the prior quarter, this result was driven by continued improvement in cost and product mix. Order rates continue to be robust and we enter the quarter with a solid backlog. We expect revenue to remain stable relative to our third quarter’s performance. Our Film & Electrolytics group revenue was $51.3 million, which is about 7% above prior quarter. Gross margin was 8.3% compared to 7.7% in the previous quarter. The increase in revenue was mainly driven by higher demand in our distribution channel. For the Magnetic, Sensors & Actuators business group, third quarter revenue came in at $60.1 million, a decrease of $2.2 million compared to the prior quarter. The decrease was primarily due to cyclical capital equipment sales combined with a negative foreign exchange. Gross margin clocked in at 28.2%, an increase of 4.2 percentage points over the prior quarter. This increase is a result of the combination of the ongoing fair value adjustments for the acquisition of TOKIN, which was partially included in the previous quarter and a favorable product mix. Major factors that contributed to this are an increase in demand for antenna units for portable game machines, PSO actuators for semiconductor equipment and PSO transducer for fish finders. Demand for Flex Suppression sheets for Smartphone and Inductors for the automotive markets continue to remain stable and strong. Now to the regions, Europe closed strong with $68.7 million, which is up to 3.3% versus last quarter and up 23.2% compared to same quarter last year. This is higher than expected considered a normal seasonality in Europe. Automotive, industrial and distribution continue to show demand. The U.S. closed strong at $42.5 million, almost flat from prior quarter and 30.9% up compared with the same quarter last year. In the Americus revenue grew to $65.1 million up 5.6% compared to the prior quarter, it was another strong quarter for POS, which was up 3.6% over the previous quarter. This was the fifth quarter of consecutive growth with our channel partners. The Americus continues to engage with technology startups and drive design with existing customers which is fueling future growth. For Asia, revenue clocked in at $124.2 million down by 3.4% from prior quarter due to normal seasonality in Asia and yearend inventory adjustment from customers. POS closed at $52 million, up 6.1% compared with last quarter and 24% compared with the same quarter of last year. The markets in Asia are positive, strong bookings from all channels and customers. Distributors are increasing inventory as the supply chain continues to tighter. Our revenue in the third quarter for Japan and Korea, our fourth region came in $48.8 million, an increase of 8.2% versus prior quarter. The book-to-bill remains positive with strong demand in automotive medical and the semiconductors manufacturing equipment. Distribution revenue was up 11.1% globally versus the previous quarter and improved 37.9% versus the same quarter last year. POS improved 3% compared to last quarter and 24% versus the same quarter last year. Inventory in the distribution channel increased by 5% and remains stable relative to POS growth. We maintain our focus and efforts to drive POS growth with our channel partners, while maintain a balanced inventory levels and revenue patterns. Once again, the highlight for the quarter was our robust performance in the high service of what used to be called the catalog distribution activities with another record POS quarter. The focus during this time with extended lead times is to insure that our partners do not over stock and that we help them focus their investment on high running components. We believe we are being successful and that POS and POA is in a good balance. We are laser focused on insuring that we continue to stable balanced, so far so good. Let’s have a look at our performance by market segment. On a percentage of revenue basis the automotive segment shows an increase of 16%, the computer segment at 20%, consumer at 15%, industrial at 27% and defense and medical segments have 4% and 5% respectively. We are all stable compared to last quarter. The telecommunications segment at 13% was slightly down compared to last quarter. All our key segments continue to show strength. In automotive there has been a solid increase in both numbers of cars produced and new vehicle registration basically across all regions. Looking ahead we believe the electrification of the car will bring further opportunities for KEMET. Q3 also confirmed the positive signs on the computer and consumers segments driven by sustained high demand of solid state drive devices as well as game consoles and laptops in general. Industrial was basically flat with a positive outlook for Europe where the recovery we witnessed in 2017 is predicted to continue and even gain further momentum in 2018. In telecom there is an excitement over the 5G deployment in China, where we expect the first standardization of the 5G protocol to be launched around June timeframe. This will be another key driver for demand for our products. Lastly, positive growth is also expected from our military segments. Thanks to a trend of new designs and overall increase in spending budgets. Now on to the forecast for our fiscal quarter ending March 31. We expect sales to be in the range of $300 million to $310 million and we expect the temporary decline in growth margins to the ranges of 27.5% to 28.5% and this is due to a product mix shift within the MSA business group. MSA is more consumer focused and generally enjoys a stronger mix from a margin perspective in the December quarters and the following large quarter. Although Christmas did not impact as much in Q3 in this quarter we of course have the Chinese New Year which may affect revenue. Having said that given our backlog and where we are today, orders in shipment. Both ahead of last quarter we expect revenue to be similar to Q3, but the mix between Magnetic Sensors will temporarily move the margin. We expect the mix to shift back in the June quarter and SG&A should be in the range as Bill said of $40 million to $42 million with R&D flat quarter-to-quarter and taxes as Bill said also $3.2 million to $3.8 million, excluding any impacts from that new tax reform bill. We are forecasting another strong quarter and a strong finish to the fiscal year. Book-to-bill is about $1.2 million; backlog is strong and lead times are extended. As I said, we are increasing capacity because we see strong business opportunities for KEMET now and for the next fiscal year. And finally, thank you to all of the KEMET people who gave their best everyday to make these results possible. Operator, this concludes our prepared comments and we’ll be happy to respond to any questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Josh Nichols. Your line is open.

[Per Loof:]

Hello Josh.

[Josh Nichols:]

Yeah, how is it going? I mean, obviously a strong quarter for you guys.

[Per Loof:]

It’s going good.

[Josh Nichols:]

Could you talk a little bit about what you’re seeing as far as product lead times in some of the different areas?

[Per Loof:]

I mean they are extended in many of our products, MLCC of course especially, but also in polymer and some of the analytics and some of the film and sensors and activators. So I think this lead – the lead time extensions are kind of pretty much everywhere and we are putting in a system to ensure that our customers can have the products they expect. So we have a system within our order booking system that allows customers to you know – that we ensure customers that they will have products. So they don’t have to book way-way in advance and speculatively, so.

[Josh Nichols:]

Thanks. And then I was going to ask, you know obviously supply is really tight right here, but there is some additional capacity coming on in this space. Any idea how long do you think it will take until like supply and demand be aligned a little bit into a more typical environment in terms of our pricing and lead times?

[Per Loof:]

Well, you know it’s a good question, but it’s very difficult to answer you know. I tend to believe that what we see now is not a cycle, it’s a trend. Explosion of devices, the connectivity of requirement between all these devices I think will continue to drive demand. The electrification of the vehicle base, which just have started, I think this is going to increase dramatically over the next three, four, five years. So I think we can – we’re entering a period where supply is tight and where people, you know our competitors and ourselves have been pretty careful in how we invest in capacity and therefore I believe at least next year we’ll see you know lead times to be extended and demand to be strong and of course borrowing any other macro event that could impact that. I think this will continue for a while.

[Josh Nichols:]

Thank you and then you know on that note you know so there is some capacity coming on in this space. How would you I guess characterize the pace of capacity ramp relative to the current demand environment? Will you say it’s in line or a little bit faster?

[Per Loof:]

We are you know enjoying strong book-to-bill and as I said you know in my prepared remarks we could have shipped had we had more capacity and we are increasing on an overall basis 10%, but of course very targeted. We are increasing capacity in MLCC, we are increasing capacity in tantalum polymer, we are increasing capacity in axial lytics and in film for automotive, as well as in sensors and actuators and material. But that is a 10% increase for us and it seems what I can see from public remarks that have been made by our friendly competitors that they are doing about the same. So that tends to – I tend to believe that is pretty balanced, but of course we’ll have to see how the year progresses, but it’s going to take a while for this capacity to come online.

[Josh Nichols:]

So essentially you’re expecting high demand and strong extended lead times to continue through the fiscal year?

[Per Loof:]

Yeah, we do, because you know it’s not just in one area that’s growing, everything is growing but not explosively, which gives you a feeling that you know on a region basis Europe, Japan, which both haven’t grown much since lately, but now are and the U.S. and Asia is growing. In terms of the segments they are all growing, so I think there is some you know reason to be optimistic about how this market will develop over the next year.

[Josh Nichols:]

Well, thanks for the insight. Again, obviously a very strong quarter. I look forward to hearing your updates on the next call.

[Per Loof:]

Okay. Good to talk to you Josh, thank you.

[Operator:]

Your next question comes from the line of Matt Sheerin. Your line is open.

[Matt Sheerin:]

Yeah, thanks. Good morning guys. A question just on you talked about the capacity as not coming; it sounds like for at least two to three quarters. So meantime in terms of your revenue, well maybe instead of revenue in terms of your unit output, it looks like you’re at capacity, so you’re going to be within this range and what’s going to drive revenue and gross margin is a function of mix and pricing. Is that a way to think about it?

[Per Loof:]

Yeah, in this quarter that’s the right way to think about it. Our gross capacity will come on a little by little. You know what I said was at the end, you know a year from now we expect that to be an additional $100 million of run rate, but it will come on you know over the quarter. So it’s not going to you know come in one big pot.

[Matt Sheerin:]

Yeah, and you obviously – I mean your revenue was up, your cost of goods was down. So obviously a much better environment and I am sure mix had to do with it. You talked about magnetics, but also I saw the capacitor business was up significantly on a margin basis, so you’re obviously seeing some favorable pricing. So talk about that and is that – as you look at your new contract pricing, I know that this is the time of year when you’re contracting with your big OEM customers. What does the pricing environment look like and will that favorably you know impact your margins going forward?

[Per Loof:]

You know the pricing environment as you might expect is favorable today and many of our competitors from what we can understand embrace their prices; particularly on you know low priced items. We see pricing to be very stable now and that of course gives us the opportunity to improve margins, because we continue to improve our efficiencies and so forth. And the product mix; meaning that our – since our R&D folks are doing really well, our mix is better and our margins are better because the products are newer and that impacts you know the margin performance and we expect the margin performance to be positive as we go into the next fiscal year. This quarter is a little specific, because some of our products that are related to consumer products with nice margins are less this quarter in magnetic and sensors and activators and that’s what’s driving the margin change quarter-over-quarter. The other groups were pretty stable from the margin perspective and they may be improving a little bit.

[Matt Sheerin:]

Okay, and what was the book-to-bill ratio?

[Per Loof:]

It’s about 1.2.

[Matt Sheerin:]

1.2, like you mean today?

[Per Loof:]

Like today, yeah. I mean it’s been – you know we are trying to control particularly our distributor partners from putting too much in the way out there and that’s why we have the buckets that we give them, so they can be assured that they don’t need to book way-way in advance. We will have products available for them when they do require them.

[Matt Sheerin:]

And do you think that 30% gross margin is sort of a one off or do you think that’s achievable as you get into. I know you have cost cutting that’s going to also impact your SG&A, but in terms of the mix shift here, do you think that you will be able to get to that margin again?

[Per Loof:]

Well I think we will be able to get to that margin as we get into Q1. This quarter as I said, you know this has been one business segment and it really is a big drop in that segment because of the product shift, but that will return back to Q1.

[Matt Sheerin:]

Okay, and a question for Bill on your – I know you’ve got some debt that you’ve talked about potentially refinancing after April. I mean is that something that you’re still contemplating?

[Bill Lowe:]

We’re still contemplating. As we said, we entered into the term loan right on the heels of the closing the TOKIN acquisition without the benefit of the performance that we’re experiencing behind us. Of course we had it in front of us, but in front you don’t get, it doesn’t get you the ratings that you would deserve on it. So we’re going to take a hard look at that and see where it puts us that we were to re-price it or refinance it. There still would be a 1% premium associated with it after April, but it may be worth it. We’ll evaluate that and you’ll hear from us about that time.

[Per Loof:]

I’m sure Bill will be in New York talking to some of these dudes as he moves forward.

[Matt Sheerin:]

I’m sure. And then just regarding the new tax laws, it sounds like net-net there is really not much change to your tax rate going forward, right.

[Per Loof:]

Not for us.

[Bill Lowe:]

No, there won’t be, there won’t be.

[Matt Sheerin:]

Okay, alright. Thanks a lot guys.

[Per Loof:]

Thanks Matt.

[Operator:]

Next question comes from Marco Rodriguez. Your line is open.

[Marco Rodriguez:]

Good morning guys. Hey, thanks for taking my questions. I was wondering if you could maybe circle back here on just kind of your order patterns. I think I heard quite a bit on – I’m assuming distribution channel. Pretty strong you saw in the quarter and it sounds like its continuing in this quarter. Can you maybe kind of compare and contrast what you might be seeing, order rates from the OEMs and EMS channel?

[Per Loof:]

Yeah you know the OEM are all – I mean as I said, they are all doing well. They are looking for parts and the EMS channel will sometimes when the December quarter comes out of it and it did, but we are seeing all channels doing positive. But of course the distribution guys, they reached so many customers. That channel really has the opportunity to continue to grow even further.

[Marco Rodriguez:]

Got you and you mentioned here on answer to one of the prior questions about the dist channels. You are working really hand with them to make sure that they are not ordering in advance and kind of assuming them that you have the product when they’ll need it. Are you kind of seeing any elevated levels of I guess for lack of a better word kind of panic from them, just given the extended lead times out there or are they fairly normal in the current environment?

[Per Loof:]

I wouldn’t say panic, but clearly they want to be assured that they have products when they need it, and therefore each of our distribution partners have their own bucket. So nobody can come ‘steal’ their products if you want to call it that. So I think working with them, by having this capability in our systems, you know will insure that they have the products when they need it and therefore we’ll normalize the order pattern.

[Marco Rodriguez:]

Got you. And on the Solid Capacitor side, just kind of wanted to circle back around with that, really strong sequential growth. One of the highest I think you guys have seen here in the recent past. Were there any particular areas that really kind of drove that or was it kind of broad based? Any sort of color there?

[Per Loof:]

It really is broad based. It seems as I said, regionally it’s everywhere, segment wise it’s everywhere and of course its shifts a little bit from quarter-to-quarter. But it is really pretty broad based actually, which gives us a bit of you know comfort that this is more of a trend than a cycle.

[Marco Rodriguez:]

Okay and then the two announcements you had today, the investment and JV, both if I heard you correctly and read correctly in the Film and Electrolytic sector. Should we think about, I mean just given that a few years ago we were talking about perhaps you know reevaluating the F&E business that you had internally. Is this kind of – should we kind of read into this as a kind of change in heart as far as the approach and the opportunity going forward for that type of business.

[Per Loof:]

You know I think we are seeing opportunities in this business relating to the electrification of the automotive segment as well as alternative energy, and this is a move to ensure that we can actually produce these products at reasonable price cost and also given the investments in Novasentis, it’s a new opportunity for us where we are actually are able to use our manufacturing and technology capabilities and film to help Novasentis produce the world’s thinnest haptic actuators. So this I believe has strong potential, but of course it’s going to take a while for that to turn into revenue. The JV will give us an opportunity to improve our manufacturing footprint in China, which of course is where most of these cars are being produced and solid today. Also it gives us an opportunity to log into their supply chain, which will improve not just the JV cost performance, but also our cost performance overall. So we believe we can improve the margins in this segment and we believe we have technology that we can use in these segments and we believe that there will growth over the next several years in this area. We would like to be a part of that.

[Marco Rodriguez:]

Got you. Thanks a lot guys. I appreciate your time.

[Per Loof:]

Okay.

[Operator:]

You have a question coming from [Inaudible]. Your line is open.

[Unidentified Analyst:]

Hi, good morning. Is there any update with regards to the TOKIN and the trust investigation?

[Per Loof:]

No, we have – we believe nothing has happened since the last call in terms of further updates. We believe we are accrued currently and we think there might be some movement in the next month in so in Europe potentially, which is one of the two that is still remaining, but other than that nothing to report in that area at this point.

[Unidentified Analyst:]

Okay do you have a certain dollar amount of cash kind of year-marked for any potential legal payment?

[Per Loof:]

Well, you know we have accrued still about $84 million if I’m correct, if I remember correctly and these payments are going to come in over a total of eight years starting from a year ago. So from a cash flow perspective we believe that we can handle this from a normal cash flow performance. But clearly $84 million went out to be paid out over the next eight years.

[Bill Lowe:]

I mentioned in my formal remarks that there will be – this particular next period six to nine months is a little heavier in cash flow for those payments, but then at Per said the rest of its just spread over the remaining seven years of the plan. So it’s a fairly easy, and if you look at it as an average, you would say may be your average paying out $10 million to $12 million a year over the next seven years, that’s not a very big number compared to number one our cash balance and number two, our cash generation.

[Per Loof:]

I mean over the last – as Bill said, over the last two quarters we generated almost $60 million.

[Unidentified Analyst:]

Right, no that makes senses. And then you mentioned obviously you have a very strong cash balance currently and you mentioned potential, you know increase in capacity or maybe M&A. Is there a potential for repaying or paying down some debt as well in the term loan.

[Bill Lowe:]

I think when we look at re-pricing or refinancing we’ll also look at improving our leverage statistics even further by potentially having less debt as we go forward.

[Unidentified Analyst:]

Perfect. All right, thanks guys.

[Per Loof:]

Thank you

[Bill Lowe:]

Thank you.

[Operator:]

[Operator Instructions]. There are no questions at the moment please continue.

[Per Loof:]

All right. Well, thank you all very much. I appreciate you being on the call. We had a strong quarter. We expect to finish the fiscal year strong and we have an optimistic view and a positive outlook for the next fiscal as well. So thank you all very much and have a great day.

[Operator:]

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