KraneShares Dynamic Emerging Markets Strategy ETF
Q4 2017 Earnings Call Transcript

Published: 10 May 2017

[Executives:]

Richard Vatinelle - VP and Treasurer Per Loof - CEO Bill Lowe - EVP and CFO

[Analysts:]

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

[Operator:]

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to KEMET's Fiscal Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Richard Vatinelle, Vice President and Treasurer. Please go ahead, sir

[Richard Vatinelle:]

Thank you, Stephanie and good morning everyone. Welcome to KEMET's conference call to discuss the financial results for the fourth quarter of fiscal year 2017 ending March 31. 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 that should help you follow along in the financial portion of the discussion. 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 Per.

[Per Loof:]

Thank you, Richard and good morning everyone. It was an exciting fourth quarter in beginning of our new fiscal year. The TOKIN acquisition has been yes long in the Macon actually eight years since we first floated the idea with NEC. As we now are able to fully appreciate the outcome yes I do agree but longer to, however we could not be more pleased with the outcome. All stakeholders will benefit. Shareholders, we are now set to improve our financial performance and yes accretive out of the gate customers, because we can now serve them with a much improved and extended product set and geographic reach. The employees of both TOKIN and KEMET plenty more opportunities for our people. Our partner NEC that work with us to bring it to such a unique and successful result is very pleased with how our four-year-old joint venture finally became a KEMET business. We believe that we have successfully concluded a unique and one-of-a-kind acquisition that not only add strength in revenue and EBITDA but an opportunity to grow EBITDA and EPS substantially over the next couple of years with the synergies we've outlined when we announced the transaction in February. We have an excellent management team in place with TOKIN and they expect to be able to continue to grow the business from an existing EBITDA level of approximately 26 million to 46 million over the next two years. As I said, we also expected to be accretive to earnings in our first fiscal year together. In addition to creating strength in the income statement, this acquisition greatly enhances our balance sheet. If you recall, the effect of the EMD sale not only funded the KEMET share purchase of TOKIN but provided additional cash to the balance sheet of approximately $42 million. The post closing combined cash balance of KEMET and TOKIN was approximately $265 million. This had the immediate effect of lowering our net debt from $273 million to $118 million helping us drive our leverage statistics lower, obtain upgrades in our credit ratings and access to the term loan market. We used some of this cash to completely repay our outstanding revolver balance of 34 million and convert the outstanding amount of the bonds from $353 million to $345 million as we got the term loan. We completed the term loan financing on April 28, 2017 and provided notice to our high-yield bondholders the same day. We told you during our February 23 call from Tokyo, that we plan to complete the refinancing before the beginning of May and we state right on target. We completed all these transactions within 64 days beginning with the signing of the EMD transaction on November 23. The term loan was fully funded on April 28 and a 30-day call notice provides for our bondholders as required. This new term loan will lower our cash interest expense by almost $13 million annually. Key terms of the new note are as follows; this is seven-year term interest at the rate of LIBOR plus 6 on a basis point where the 1% LIBOR for. The original issue discount paid was 300 basis points. There is 102 and 101 hardcore at one year and two years respectively, 5% amortization of principal per year paid quarterly and it does not and I repeat does not have Quarterly Maintenance Covenants. This should refer to our 8-K on the matter for all provisions of the term loan. In addition to the term note and at the same time we entered into a new amendment to our current revolver facility which increases the size of this facility to 75 million and offers lower pricing. We repaid 100% of the outstanding revolver as I said on April 24 so as of today our borrowings under the revolver facility have all been repaid and our balance is zero. It is an exciting time for us to celebrate the completion of this long effort to make this a reality. We have effectively remade KEMET with a transformational transaction. However, now our new goal is being established as we fully combine forces with our TOKIN team to obtain the synergies that will further create stability and financial performance into the future. Our new work has just begun. Our synergy teams will be hard at work implementing the plans they developed quite some time ago actually to reduce our combined operating costs and to achieve our financial objectives. You will see several announcements this fiscal year about certain actions we will take to streamline our operations both at legacy KEMET and our TOKIN operations. It is part of the process and is one component of how we will achieve our new financial goals. Thank you to all the shareholders that believed in our strategy and thank you to the KEMET and TOKIN employees that worked so hard to bring this to such a successful conclusion. Now let me make some brief comments about our fourth quarter ended March 31. The fourth quarter was another successful quarter with financial results exceeding our forecast. Revenue was $197.5 million and adjusted EBITDA improved from last quarter to $27.2 million. Our cash balance again exceeded our forecast ending at $110 million. Comparing this quarter with a year ago at March 31, 2016 revenue improved $13.6 million year-over-year or 7.4% and adjusted EBITDA is up $4.2 million or 18.2%. The revenue of $197.5 million was above the top of our forecast range of $192 million. Our fiscal '17 Q4 is the first quarter of sequential growth and the highest revenue level since the December 2015 quarter. I’ll come back to you on markets and our business groups in a few minutes, but first let me turn over the call to Bill to provide a detailed review of the financial results. Bill?

[Bill Lowe:]

Thank you, Per and good morning everyone. As usual I'll begin my review on Slide 3 if you're following along on the website. As Per said, net sales for the quarter of $197.5 million were up 7.4% in the prior year of $183.9 million and our GAAP net income for the quarter was $53 million. On Slide 4, our non-GAAP gross margin percentage increased by 100 basis points to 25.4% compared to 25.3% in the prior year and our non-GAAP adjusted net income was 7$.8 million compared to $1.8 million in the prior year. Compared to the prior quarter, GAAP gross margin was flat compared to last quarter 25.2. The non-GAAP gross margin at 25.4 as I just said, puts us in a position where both of our gross margins were at or above our timeless model target. Non-GAAP SG&A expenses of $25.8 million were up compared to the $22.6 million in the prior quarter ended December 31 and our adjusted EBITDA for the quarter was $27.2 million, an increase of 18.2% from the 23 million in the prior year. On our non-GAAP quarterly net income resulted in a $0.17 per basic share and $0.14 per diluted share for the quarter. From a full-year perspective revenues were up 3.1% to $757.8 million compared to $734.8 million last year at March 31, 2016 primarily driven by increased revenue in EMEA and Asia distribution channels. Our gross margin was up significantly from last year at 240 basis point increase to 24.6% from 22.2%. Moving to Slide 7, the capital expenditures during the quarter were $10.6 million compared to $4.7 million in the quarter. We finished the year at $25.4 million just slightly above our forecasted range and for this coming quarter we expect to spend in the range of $9 million to $12 million and capital expenditures for the full-year will be in the $35 million to $40 million range but what was our legacy KEMET locations and approximate $49 million including the TOKIN operation. In future quarters I will not be separating those statistics as TOKIN becomes part of with the one KEMET organization. You will notice that we have increased our CapEx forecast slightly. We are selectively adding some capacity in our polymer, ceramics, lytics space as we try to minimize our CapEx over the last couple of years to build cash and position us for refinancing in the TOKIN acquisition. Regarding our cash balance on Slide 7s and 8s, we did finish the quarter as Per said with $109.8 million adding $44.6 million to the prior-year balance. The working capital and supply chain moves we announced during the year contributed a little more than we forecasted and help us succeed our forecasted range. Kudos to both the tantalum operating group and our supply-chain team. We expect our cash balance to be in the range of $190 million to $210 million at the end of the June quarter. This range is effective by the end of the dollar conversion rate. The adjusted EBITDA margin trend is also increased to 13.8% from 9.4% seven quarters ago. Additionally our LTM adjusted EBITDA margins have steadily increased from 11.6% to 13.9% since December 2015 as noted on Slide 10. Regarding the performance of NEC TOKIN revenue in the third quarter, was 149.9 oku yen or approximately $130.5 million. Our share in the financial results for the quarter was an equity income of $41.4 million. During the quarter TOKIN did record a deferred tax asset. The use of the NOL is driven by the April sale of the EMD business unit, creating this large positive net for the quarter. Now I'll turn the call back over to Per for comments in the markets, our business units and our upcoming forecast.

[Per Loof:]

Thank you, Bill and let's I have a look at our performance by market segment. On a percentage of revenue basis, the industrial consumer segment showed an increase at 25% and 9% respectively. Computer, defense and medical segments remain stable at 16%, 5% and 6% respectively. Telecommunications and automotive segments at 19% and 20% respectively were slightly down compared to last quarter. Turning to our business group and the solid capacitor group revenue versus the prior quarter was up $7.4 million or approximately 5% at $149 million. The revenue increase was broad-based that we saw improvement in all channels quarter-to-quarter. Gross margin in Q4 was approximately 31%, an improvement versus prior quarter sales of approximately 30 basis points. This result was driven by the improved revenue performance and continued progress in our cost and mix enhancement initiatives. Order rates were robust in Q4, so we enter Q1 with a solid backlog and we are to-date ahead of where we were same time last quarter. We expect to see incremental improvement in revenue in Q1. Our film and electrolytic business was $48.5 million in revenue as compared to $46.5 million last quarter, an increase of 2 million or 4.5% quarter-over-quarter. Revenue from Europe and Asia drove the revenue increase with the Americas being flat. Orders continue to improve as evidenced by book-to-bill of 1.22 at the end of the quarter. Gross margin for this business slightly decreased to 8.6% versus 9.4% from the previous quarter. This change was mainly driven by a different product mix sold in the quarter. The Group is focused on continue to increase revenue by working with OEM and distributors on projects and segments that we know are growing. Now to the regions, Europe closed with $61.6 million, up by 10.5% quarter-over-quarter, slightly higher than expected due to seasonality and up 2.5% compared to the same quarter last year. While automotive and industrial business stayed flat as expected, our channel revenue was up by 22% quarter-over-quarter and 16% year-over-year. POS closed at $40.6 million up 25% from previous quarter while the inventory in the channel stayed flat. It was also a good quarter for Asia. Revenue was up 2% to 78.7% from the prior quarter. As expected, POS decreased in the quarter by 3% due to the Chinese New Year. However, POS was up 27% compared to the same quarter last year. The market is positive in Asia as bookings from automotive and consumer segments remain strong. We continue to see new and innovative applications emerging in the Asia marketplace which positions us to take advantage of key opportunities. The focus in Asia will continue to be POS growth easy to sign in and segment campaigns. In the Americas, Q4 revenue finished up 4% over the previous quarter ending at $57.2 million. POS was actually better than anticipated coming in at $36.1 million which is slightly over 1% up versus previous quarter. The Americas has a strong book-to-bill currently at 1.32 driven by distribution, all both OEM and EMEA business up showing positive book-to-bill as well. The Americas are seeing good movement of the aerospace and defense segments along with the continued and robust design activity in the automotive segment. For the company globally distribution revenue was up 15.8% versus the previous quarter and improved 20.7% versus the same period a year ago. POS up 6.3% compared to last quarter and up 10.4% versus a year ago. Inventory in the distribution channel increased by 3.2% and remains relatively stable. We maintain our focused efforts with our channel partners to drive growth and POS demand while maintaining a balance in the inventory levels and revenue guidance. Now let me turn to the first quarter of fiscal 2018 and discuss our forecast with June 30. It will of course be the first quarter combining TOKIN into our financial results. So comparisons are a little tough at this point while we're going to try to provide some details to help you sort through it. It is also a little difficult for us as well so much - not regarding the totals but as we break down the income statement it's a bit of a challenge to make sure that we're mapping the TOKIN expenses into the same categories as KEMET. This may impact gross margin and operating margin forecast as an example. We will appreciate if you give us a little bit of latitude to this first quarter as we forecast the combined business. In addition, we do not at this date know the income statement effect of purchase accounting at this point. My comments on the forecast will exclude purchase accounting impacts and also as a reference we are converting the yen at 112 to the dollar for the June quarter. We are forecasting our sales to be in the range of $278 million to $288 million for Q1. For comparison at cost and exchange rate, sales in the March 31, 2017 quarter including KEMET TOKIN were $277 million and a year ago June2016 our combined sales were $256 million. So we are expecting our sales to be up slightly both quarter-to-quarter and year-over-year at June 30. However combine gross margin may decline slightly from the KEMET and the loan level should be in a narrowband between 25.5% and 26.8%. Combined SG&A is expected to be in the range of $38.5 million to $40.5 million and R&D will be approximately $9 million in the quarter. This brings us to interest expense and taxes. Interest expense this quarter will be higher than last quarter, why? Well because under the terms of our high-yield bonds the call of those bonds was not revocable so we made sure we were funded before we call the bonds. So both loans are in place during the month of May. These bonds had a 30-day call notice. Therefore interest expense for the June quarter should be in the $10.7 million range. Going forward interest expense should be approximately $6.6 million per quarter, cash interest being approximately $6 million with the balance being the amortization of the original issue discount paid at the closing of the term loan. That is a savings of approximately $13 million per year. Combined taxes per quarter are expected to be in the range of $2.5 to $3 million. This forecast also excludes the impact of the sale of the TOKIN EMD business which actually occurred in April. So as always thanks to our hard working people that make the extra effort every day to improve our performance and enhance our customers expense. So this concludes our prepared comments and we are happy to respond to any of your questions.

[Operator:]

[Operator Instructions] Our first question is from the line of Jim Bartholomew, a Private Investor.

[Unidentified Analyst:]

Yes, good morning gentlemen. Some weeks ago I presented an idea to management that we be represented in Value Line which publishes investment information. We used to be represented in Value Line, has there been any discussion going forward to be represented?

[Bill Lowe:]

Jim, this is Bill. Yes, we're talking about that internally. It's been - it's on my plate and my plate has been extremely full over the past 60 days.

[Unidentified Analyst:]

I can understand.

[Bill Lowe:]

Now, things are back to just crazy normal, I'll be looking into that, I mean I'm not going to say, where we go with that, but I will be looking appreciate the note. I have it on my desk and its' my to do list.

[Unidentified Analyst:]

Very good, I appreciate that.

[Operator:]

Your next question comes from the line of Josh Nichols with B. Riley.

[Josh Nichols:]

So, just wondering, now that the company's balance sheet is solidified very nicely, what's company's kind of outlook and target as far as capital structure? You have a lot of cash dividend, share repurchases, how do you think about these things.

[Per Loof:]

Yes, we appreciate the cash and as I have said to investors when we talked about this, we are going to enjoy the cash balance little bit just looking at it actually. But in terms of dividends we are not thinking about doing dividends and we are not thinking about share repurchase. Bill you may want to.

[Bill Lowe:]

Just to comment that if you look at the terms of the term loan, we do have - and there's a restriction on how much of course we could do that and if we chose to do it's a fairly small amount. So it's not really on the radar screen I think the emphasis is still on lowering our leverage statistics so that we can continue down the road to borrow it even less - at lesser rates, continue to increase the EPS for our shareholders by having less interest expense on an overall basis and less debt. So that's where our focus is that we hope - we believe will benefit our shareholders to increase EPS to debt reduction and less interest expense on the rate.

[Per Loof:]

And you know, as part of the term loan, we are paying back…

[Bill Lowe:]

There is a 5% automatic amortization on the term loan.

[Josh Nichols:]

Thank you. And then what are you seeing this far as in terms of capacity utilization? You mentioned you might be expanding a little bit. And lead times regarding some of the product lines that you see.

[Per Loof:]

Yes, we are seeing lead times extending a little bit, and we are seeing capacity utilization being in the upper range of what we were forecasting. And in some areas, we were actually at capacity. So the increased CapEx, we are now putting in place. That we now can afford. And of course, in the past we didn't do it because we had to save our cash so we could do this transaction. So we are seeing a slight the capacity increases in a few other product lines. And so the additional CapEx will facilitate that.

[Josh Nichols:]

And then regarding the additional CapEx, how long would it take for that additional supply to come online?

[Per Loof:]

Some of them are already ongoing. As you can expect, machines have been ordered and projects have started. So typically from when you start something, it's a six to nine month process. And depending on how big of an impact it has and which market segments it will affect, that will also drive, could have longer lead times to get the capacity online because customers will want to qualify the lines et cetera.

[Josh Nichols:]

And then last question and then I’ll pass it. Some of these product lines that are seen increasing lead times, are you benefiting from any pricing power or not at the current moment?

[Per Loof:]

I shouldn't say we’re benefiting from more pricing power, but clearly the fact that that the market seems to be favorable. Of course, gives an opportunity to slow down the effect of the pricing, the pricing pressure. So I think pricing pressures are a little less. We've been able to stabilize our pricing in a share to some degree which we are happy to see. So it is a better environment now than a year ago, that’s for sure.

[Josh Nichols:]

Thank you.

[Operator:]

Your next question comes from the line of Matt Sheerin with Stifel.

[Matt Sheerin:]

Hi, good morning, guys. Just a few questions for me. So on the revenue guidance, so I know that you closed the TOKIN acquisition, I think April 19. So trying to figure out sort of the core KEMET business you had said that you expect it to be up sequentially. So off of that, base of 197, 198, we're talking what? Up low to mid single-digit sequentially?

[Per Loof:]

We’re talking - we’re up a little bit, not huge numbers we’re projecting at this point, but up a little quarter-over-quarter.

[Matt Sheerin:]

Okay. And then so for the what - can you tell a bit the TOKIN business that you’re actually acquiring, what was the ballpark full revenue for the March quarter?

[Bill Lowe:]

I gave you that. It was 149.9 oku yen or $130.5 million. But that, of course, is the entire business including the EMD business which was sold in April.

[Matt Sheerin:]

So that was my question, what was it without the EMD business?

[Bill Lowe:]

In dollar terms, about $86 million.

[Per Loof:]

And we are expecting that to increase a little bit in the quarter.

[Matt Sheerin:]

Okay. So the 86, so it looks like you're basically - so that’s the full quarterly run rate in 86 to assume a little bit less in that because you closed it two or three weeks into the quarter.

[Bill Lowe:]

No, I think with the exception of extracting out EMD for the two week period, we’ll begin our - it's close enough to beginning of the month, but we will not be trying to make adjustment. I don’t believe.

[Matt Sheerin:]

So that’s sort of a full run rate. So as we think about - and then on the OpEx side, it looks like the gross wide expected - gross margin to be a little bit weaker because of the TOKIN business, but sounds like there's not much of a difference between the TOKIN margin and your margin. And then SG&A, is that a full quarterly run rate, that 39 million or so SG&A?

[Per Loof:]

Matt that is a full quarterly run. And just to give you a little bit more color on differences in the TOKIN cost situation and KEMET traditionally, their margins are very comparable to ours. They have a little bit more expense to percent that we do. So we will be working, and that's, of course, we’ve said we're going to take $20 million of cost out of the TOKIN business over the next couple of years, and that's where the majority of that cost will come out.

[Matt Sheerin:]

And just in terms of, as we look the through the fiscal year and appreciate that you just closed that deal and you're working on the restructuring programs et cetera, but is that going to be, in terms of those cost coming out, sort of a 10 million over the next couple years, more backend loaded towards the end of your fiscal year this year? Is that the way to think about it?

[Per Loof:]

We’ve worked with them with a joint venture for four years, and we've been on the board, and I’ve been the chairman for the last four years, of course. We know these folks pretty well. And this wasn't the first actions we’ve taken to improve the business which has improved dramatically over the last four years. But what you can expect is a $10 million a year savings over the next two years.

[Matt Sheerin:]

I’m not sure you gave the book to bill ratio just for the solid capacitor business, and you gave it for the overall business. So what was it for the solid capacitor business?

[Per Loof:]

It was 134 for the total business, and I think the solid capacitor business is probably about same range actually.

[Matt Sheerin:]

Okay. And you said distribution sales were up 20% year-over-year. Obviously much better than end markets are doing. It sounds like inventory is up just a little bit. But obviously, we've seen from other suppliers and the concern of an inventory build here. And as you know, having been in this business a long time, if demand doesn’t play out, then we’re looking at potential correction at some point down the line. Don’t know when. But is there a concern there in terms of as you’re shipping and adding capacity, shipping to the channel, make sure that there's actually end demand underlying there.

[Per Loof:]

We are very sensitive to this as you can imagine having been in this business a long time. And you’ve been watching the business a long time. We are in constant communications with our distribution partners to make sure that we don't overstock. And we have the systems in place to be able to understand that. And as you know, we know exactly what their sales are. So we make sure that if there is an inventory build, that is because the business is improving. And it is. And the fact that we had such a huge increase in distribution revenue this past quarter compared to a year ago was, as you can remember, the channel was trying to realign itself from an inventory perspective, and that kind of peaked a year ago. So we’re not really concerned. And we’re having some interesting discussions with some of our distribution partners and telling them that they don't really need the product they think they need. So it’s sort of an interesting conversation. But we also need to make them understand they don’t need the price they don’t ask for the product form from our competition. But we're very concerned with that, and all eyes are on that particular activity for sure.

[Bill Lowe:]

I was going to say, Matt. I think Per actually said in his formal comments that the inventories have not really increase in the channel for us that much.

[Per Loof:]

Just a little bit.

[Bill Lowe:]

Just a little bit, but it’s not a big number.

[Matt Sheerin:]

Okay, fair enough. And just lastly, as you’re seeing increased demand here in terms of your tantalum supply chain, and tantalum inventory et cetera, how are you positioned going forward here?

[Per Loof:]

We feel very confident in our tantalum supply chain, and we have still to date have had no supply issues coming out of our African mining partners. And we continue to see that to be very stable, and we are not concerned about at all actually. We are watching, and we’re staying on top of it, of course, but it's a good supply situation at this point. And as you know, we have, over the last several years, actually supplied over 80% of the tantalum TOKIN required as well. So that supply chain has already been established

[Matt Sheerin:]

Yes, got it, okay. All right thanks a lot guys and best of luck this year.

[Operator:]

Your next question is from the line of Marco Rodriguez with Stonegate Capital.

[Marco Rodriguez:]

Hi good morning guys thank you for taking my question. I apologize if I didn’t catch this but did you review the post close cash and debt?

[Bill Lowe:]

We did, we said the post-close was $265 million in cash and of course the debt is $345 million after the term loan happens which will be as the bonds have been called and we will repay them at the end of this month.

[Per Loof:]

No we did use this period if you didn’t catch a bit. Post closing cash was 265 and you just said and we use some of that cash to pay down the revolver of course pay the OID. So debt after the term loan transaction is 345, cash is around 216 or so post doing the term loan after the closing of the TOKIN transaction?

[Marco Rodriguez:]

Got you, okay. And then in terms of the F&E business, wondering I might spend a little bit of time there obviously you guys have done a lot of work there on the cost side and you're certain you kind of see some improving metrics. Just kind of walk us through your thoughts on that business line going to fiscal 2018?

[Bill Lowe:]

Well we will continue to see improvement in that business quarter-over-quarter and year-over-year and that's going to continue. So we will see improvement and this takes a little bit of time to get them done, but they are happening and you can see that if you look back over the year the bottom line performance improved about 1 million each quarter starting in Q1 last year so and that will continue.

[Marco Rodriguez:]

Do you have any sort of target range for that business in terms of its operating income or operating margin?

[Bill Lowe:]

What we have said is that, this is our very material heavy business. So we're looking at - we’re expecting that business to get to a 15% gross margin level over sometime here that’s the target.

[Marco Rodriguez:]

And then just kind of following up on one of the prior questions on some of the synergies you guys will be working through here with NEC TOKIN acquisition. I think you guy said about 10 million this year and 10 million the following year. Should we be thinking about that from a modeling perspective as kind of just straight line across quarters or sort of ramp as the year progresses?

[Bill Lowe:]

You can put it well I think of pretty straight line actually. It maybe a little bit focused towards the end but it’s pretty evenly distributed over the course.

[Marco Rodriguez:]

And last quick question I’ll jump back in the queue, the CapEx you're adding, can you talk a little bit about the specific areas where you’re adding this CapEx where is the additional supply going to be going to?

[Bill Lowe:]

Some of it is going to tantalum polymer line where we need to add some capacity. Some of it is going into ceramics where we also need to increase our capacity and some of it is going into lytics where we also are capacity constrained. Particularly in the automotive segments both in ceramics and in lytics.

[Marco Rodriguez:]

Thanks lot guys I appreciate it.

[Operator:]

[Operator Instructions] Your next question comes from the line of [Rob Hussey with Invesco].

[Unidentified Analyst:]

Can you talk a little bit about the improvement? You had a nice improvement in gross margin and I’m serious kind of what the buckets closed with that improvement I know you’ve been working on operational results, material savings but its not clear to me, what made up what portion of that improvement?

[Per Loof:]

The improvement in gross margin has to do with improvements in our material cost driven by our supply chain investments in particular in the tantalum side but not only. So the fact that we have a vertically integrated conflict free supply chain and tantalum has of course over the years improved our performance dramatically, as well as providing some decent employment opportunities and other opportunities for the people in Africa. But in our film side it’s also been vertical integrating by allowing us to mobilize our film ourselves which of course gives us opportunities from a cost perspective. And it also has to do with lining up our plant structure in a more effective manner and closing a bunch of facilities and building a few new ones and moving a lot of lines from more expensive parts of the world to more cost effective regions of the world. So the gross margin improvements are kind of pretty broad-based it has to do with labor cost, has to do with material costs, also has to do with efficiencies in our plants as an example. Since we started working with TOKIN this was from a joint venture perspective we learned a lot about in KEMET how to improve our yields. And our yields in our polymer line, our own polymer line has started working with TOKIN has improved by six percentage points. So kind of broad-based approach to improving our performance across the product lines and across the activities.

[Unidentified Analyst:]

And so given what you have kind of in the pipeline and you just mentioned working with TOKIN - it sounds like you got some ideas. So given all of that, what’s the line of sight to the improvement that you would expect to get to, is it are we going to get five more consecutive quarters of gross margin improvement just couple more I am just trying to think you will leverage?

[Bill Lowe:]

I would like to. I think we gave you what we’re going to give you I think in terms of options.

[Unidentified Analyst:]

That’s fair all right.

[Bill Lowe:]

But let me tell you this, the book-to-bill is strong as we speak today. So it’s 134 today compared to a quarter ago was 112, so maybe that gives you some bit of comfort that yes we think that the future is barring any geopolitical issues it’s looking pretty positive.

[Unidentified Analyst:]

That’s helpful. The other question I had was really around the OpEx and it’s a little bit up in terms of its percentage of revenue which I guess I didn’t expect given I would have expected some benefit from staff. Can you talk just a little bit about what was that increase?

[Bill Lowe:]

It’s a little difficult…

[Per Loof:]

Just could you repeat that maybe just speak this louder we’re having difficulty hearing you a little bit?

[Unidentified Analyst:]

My question was just around OpEx being higher as a percentage of revenue year-on-year given these sales were up I guess I would expected some benefits from scale there?

[Per Loof:]

Well we see OpEx being driven basically by the SG&A part and actually driven somewhat by the S part of that SG&A. Our sales group is partly salary, partly commission so when our revenue is up and we’re exceeding targets we do find that our selling expense of course is higher you would expect that, as well as in the first calendar quarter of the year we typically have a little more employment. Some of the employment taxes for the year get paid in the first quarter versus the others are accrued I should say and then getting our final year incentive accruals up to where they’re supposed to be for the year based upon the final results. So, it’s a combination of three mostly driven by actually by the selling expense. So the S and SG&A drove most of that change due to the quarter being up in revenue.

[Bill Lowe:]

But I think you also should look at total year EPS on a non-GAP basis went from $0.17 to $0.44.

[Unidentified Analyst:]

Okay, great. Thanks.

[Operator:]

[Operator Instructions] At this time there are no additional questions. I would like to turn it back over to management for closing remarks.

[Per Loof:]

So thank you for being with us this morning and thank you for your interest in the company. And we’re looking forward to our combined activity here with TOKIN that's been so long in the tooth of course, but we’re excited about that and we see plenty of opportunities across the board and we’re looking forward to talking to you in the quarter. So thank you very much and have a great day.

[Bill Lowe:]

Thank you.

[Operator:]

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