KraneShares Dynamic Emerging Markets Strategy ETF
Q1 2017 Earnings Call Transcript

Published: 28 Jul 2016

[Executives:]

Per-Olof Loof – Chief Executive Officer Bill Lowe – Executive Vice President & Chief Financial Officer Richard Vatinelle – Vice President & Treasurer

[Analysts:]

Alvin Park – Stifel Nicolaus Josh Nichols – B. Riley & Co Ana Goshko – Bank of America Merrill Lynch

[Operator:]

Good morning. My name is Stephanie and I'll be your conference operator today. At this time, I'd like to welcome everyone to the KEMET Reports First Quarter 2017 Results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now turn today's call over to Richard, Richard Vatinelle. Please go ahead, sir.

[Richard Vatinelle:]

Thank you, Stephanie, and good morning everyone. This is Richard Vatinelle. Welcome to KEMET's conference call to discuss the financial results of the first quarter fiscal year 2017 ending June 30. 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 presentation. 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, 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 registration filing statements for additional information on the risks and uncertainties. Now, I will turn the call over to Per.

[Per-Olof Loof:]

Thank you, Richard and good morning everyone. I'm sorry if I sound bit hoarse this morning, but I'm a lot better today than I was yesterday. Now, the fiscal year is off to a good start with revenue of $184.9 million. Once again, we're consistently falling within -- actually near the top of our forecasted range. EBITDA increased quarter-over-quarter and our cash balance exceeded our forecast. Compared to the prior quarter, gross margin improved another 20 basis points or 23% from 22.8%. Excluding the non-cash charge of $12 million for the change in the value of the NEC TOKIN put option, our GAAP net loss of $200,000 showed improvement from the previous quarter. Net loss of $15.2 million which was not impacted by any changes in the NEC TOKIN option. The current quarter adjusted EBITDA is actually $4.1 million better than the first quarter of last fiscal year. Non-GAAP net income is $2.6 million ahead at $0.06 and Non-GAAP gross margin is 190 basis points better on revenue that is 1.4% less. Well, I'll talk about our markets little bit later, but overall the market seems relatively stable in most areas, and we're sensing a bit of an uptick kind of across the board by particularly in Europe. We continue to think that we have reason to believe that we will see some growth through our fiscal year as we have stated before. Regarding NEC TOKIN, we continue to await news from the remaining jurisdictions; however we continue to remain optimistic of completing something this fiscal year. We're excited about this prospect, although disappointed we have to continue to wait to make it happen. With that, I'll turn it over to Bill for comments on our financial results for the quarter. Bill?

[Bill Lowe:]

Thank you, Per, and good morning everyone. I'm going to begin by review as normally do on Slide 3 if you are following along on the website. As Per said, net sales for the quarter were $184.9 million, which is up 0.5% compared to the prior quarter of $183.9 million, and the GAAP gross margin percentage was higher by approximately 20 basis points from 22.8% to 23% and our GAAP net loss was $0.2 million which excludes the impact of the NEC put option as shown on Slide 5, so therefore it was basically zero for basic and diluted share compared to net loss of $15.2 million or $0.33 for basic and diluted share compared with the prior quarter of March 31, 2016. The valuation of the NEC put option which as a reminder is a non-cash accounting entry whether it's positive or negative, it excluded from number for both periods as it has no current or future impacts on KEMET operations or cash balance. And not to throw a lot of numbers at you, but if you are looking at Slide 5, please note that a substantial portion of the net loss in the March quarter was driven by our share of the NEC TOKIN equity loss. Excluding that impact, the improvement in KEMET net income this quarter versus last quarter was $4 million, a substantial improvement in net income. Moving to Slide 6, our non-GAAP gross margin percentage as Per said earlier increased by 20 basis points to 23.4% compared to 23.2% in the prior quarter and our non-GAAP adjusted net income was $0.07 per basic share and $0.06 per diluted share. Our adjusted EBITDA for the quarter was $24.3 million, which was 5.3% and $23 million in the prior quarter. Non-GAAP SG&A expenses of $22 million were down compared to the $23.5 million in the prior quarter of March, and our expectation for this next quarter is a range of $22.5 to $23 million. Now let's get forward to Slide 7. Capital expenditures during the quarter were $6.2 million compared to $6.3 million in the prior. And for this coming quarter we expect to spend in the range of $6 million to $8 million with our capital expenditures for the full year again coming in the range of $20 million to $22 million. Regarding our forecasted cash balance which can be found on Slide 8, we finished the quarter with $52.9 million, which was approximately $4 million more than we forecasted. Our bond interest was paid May 1, which was in our -- with our major use of the cash this quarter. We also repurchased $2 million face value of our outstanding bonds during the quarter. Our expectation for the ending balance of September of cash is an increase of approximately $18 million to a balance of $70 million. EBITDA for this quarter was $24.9 million as noted on Slide 10 on the EBITDA margin trend has continued to increase for the last six quarters moving from 9.4% to 13.1%. And finally, regarding the performance of NEC TOKIN, revenue in the fourth quarter came in at 132.8 oku yen which is approximately $120.5 million. Our share with our financial results for the quarter was an equity income of $0.2 million and their cash balance remains healthy at approximately $112.2 million and their EBITDA for the quarter in U.S. dollars excluding legal fees was $14.5 million. Now I'll turn the call back over to Per for comments on the markets and our business units.

[Per-Olof Loof:]

Thank you, Bill, and let's have a look at our performance by each market segment. On a percentage of revenue basis, the consumer and industrial segment show an increase of 9% and 24%. The computer, automotive and medical segments remain stable at 15%, 20%, and 7%, respectively. Telecom and defense segments at 20% and 5% were slightly down compared to last quarter. Now turning to our business groups. In the Solid Capacitor group, the revenue versus the prior quarter was $1.9 million up or 1.4% at $142 million. The increase in revenue in Q1 was driven by continued improvement in that distribution channel and the rebound in our EMS customer demand. OEM revenue was down versus the previous quarter. The drop in OEM was expected and was due to specific product program going end of life. Adjusted gross margin for Q1 was 29% as we increased revenue and improving cost offset an unfavorable product mix. Moving into Q2, orders rates are stable and backlog has improved in all channels over the prior quarter. Film and Electrolytic's revenue was $43 million as compared to $43.9 million in the previous quarter, a decrease of $900,000. Revenue from Europe was responsible for most of the decrease. Several OEMs rescheduled deliveries to a later period given demand for their own product. Orders received continued to improve during the quarter as evidenced by a book to bill of 1.1, resulting in a backlog for deliveries within Q2, approximately 2 million higher than Q1. Even though the revenue was lower than last quarter, adjusted gross margin for this business was 4.7% versus 4% for the previous quarter. The group is focused on increasing revenue by working with OEMs and distributors on project and segments which are growing. Additionally the brick line which moved from Germany to Macedonia in November 2015, begins shipping product in Q2 after successfully completing all internal and external qualifications. Now to the regions. Europe closed the quarter with $60.5 million of revenues, up 1.1% versus last quarter. We continue to see improvement in the region across both the automotive and the industrial sectors. As anticipated in our previous earnings call, the inventory in the channel is now back to a healthy level and actually slightly increased. Our POS in EMEA grew once again, and closed at $37.4 million up 2% sequentially quarter-over-quarter. The book-to-bill in the region is at 1.4 supporting a positive view on the overall status of the business. In the Asia Pacific region, it was a good quarter, despite the flat market, revenue in Asia was up by 0.6% to $69.3 million. POS also improved 12% to $36.2 million. Distribution inventory corrections in Asia have been completed and we'll now see a more balanced POS in Asia. Looking forward to Q2, we anticipate the Asia market will continue to be flattish. We believe our automotive can hold but telecom will slow down, which is a seasonal pattern. Outperforming the market, we will continue to focus on POS growth, improve our EMEA positions and drive design win for our specialty products. Q1 revenue in Americas finished flat over last quarter and you have $55.1 million. POS was up slightly over last quarter and we expect POS in the Americas to remain flat for the quarter. The America's book to bill continues to be positive. Distribution revenue was up 5% with POS improving in every region, up 4.2% compared to last quarter. Inventory in the distribution channel remain stable and actually down 0.1% from last quarter. We maintain our focused effort with our channel partners to drive growth and POS demand while maintain balance and the inventory levels and revenue patterns. Looking forward to next quarter, we see sales in the same range as $185 million to $190 million, and the possibility once again of a slight margin improvement. I believe we're expecting the quarter to be an incremental improvement, once again as we stay focused on obtaining the benefits of our prior cost-cutting initiatives and our top-line continues to grow moderately. We'll continue to work diligently to bring the NEC TOKIN forward, and as announcements are made available, we will work with our partner to bring the NEC acquisition to closure as quickly as possible. In summary, we're sensing incremental improvements across the board, and it's good to see that our profit trend continues to be positive. Now, five quarters in a row, and our EBITDA margin continues to move in a positive direction. Our project funnel with our customers is also building nicely. The second quarter start on the positive note in all regions and we do believe this will continue through the quarter even as we enter the summer month of August. As always, thanks to our hardworking people that continue to make the extra effort to improve our performance and enhance our customers' experience. This concludes our prepared comments and we'll be happy to respond to any of your questions.

[Richard Vatinelle:]

Operator, we're prepared to take questions at this time.

[Operator:]

[Operator Instructions]. And your first question is from the line of Alvin Park with Stifel.

[Alvin Park:]

Hi. This is Alvin Park speaking on behalf of Matt Sheerin. Just, in concern with the NEC TOKIN acquisition, I know there is six jurisdictions left and you mentioned that you are projected to finish within this fiscal year. Could you be able to provide any more detailed color on the remaining jurisdictions and what you are seeing so far?

[Per-Olof Loof:]

I mean we have -- what's remaining is Korea, and of the ones that are remaining Korea and Europe are the ones that are important. So, and we -- you know we continue to, the discussion is ongoing with those jurisdictions and we believe they will come to closure within the period that we're talking about.

[Alvin Park:]

And in terms of margin, I remember in the past you mentioned the ultimate goal of reaching 25% gross margins. I think currently right now, in recent quarter, you said 23.4%. Do you have, is it more of an issue, is it more of sales leverage or are there any other leverage that you could possibly potentially pull?

[Per-Olof Loof:]

What I said was, I think we're seeing the margin improvements across the board and we will continue to see this quarter as well. I don't know Bill, if you want to…

[Bill Lowe:]

As Per said on the call as formal remarks, we expect to see incremental improvements in fiscal year, so we're marching towards that goal, towards the end of the fiscal year is the track that we're on.

[Per-Olof Loof:]

And we actually feel pretty good about that. So, we think we're on the track to get there. And if you see every quarter there is an improvement. So, 190 basis point from a year ago, so it's certainly a significant change, positive change.

[Operator:]

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

[Per-Olof Loof:]

Good morning, Josh.

[Josh Nichols:]

Good morning. Hope you feel better, sounds a little hoarse

[Per-Olof Loof:]

I'm just fine. I just sound crazily bad, but it's much better than yesterday.

[Josh Nichols:]

Any detail that you could provide about the F&E segments and how the restructuring process is going, margin trends, anything like that?

[Per-Olof Loof:]

I think the, couple of things we said, we moved a big line to Macedonia, that's basically been offline for a long time and that's what's coming back this quarter. We also have the actual lines which are now in the final qualification and that will give both margin and revenue improvements and their orders for these products. So, you know I think you are going to see incremental improvement in the F&E business starting this quarter as well, and we feel pretty good about that.

[Josh Nichols:]

I know you mentioned, you said that you have seen an uptick in Europe particularly any details about…

[Per-Olof Loof:]

Obviously, we continue to see uptick in automotive, we continue to see which is good to see that industrial has started to kick in. So, pretty much across the board in Europe, we're seeing an increased order intake and also we're going to see the revenue creeping up slightly as well. And these are good projects, these are good nice project that are coming to us at this time.

[Josh Nichols:]

And the Company has made a lot of progress and it's Solid Capacitors segment with some vertical integration. I guess how are tantalum prices?

[Per-Olof Loof:]

Pretty stable actually. You know this business, you're always going to see some price pressure, but we're saying our tantalum pricing to be relatively stable at this point actually. And maybe it's a fact of the product mix and the projects we're going after, but also I think the markets are slightly more stable now than we saw previously. So, that's a good news overall.

[Operator:]

[Operator Instructions] Your next question is from line of Ana Goshko with Bank of America.

[Ana Goshko:]

Hi. Thanks very much for taking the question. So for next quarter with the revenue and the margin being flattish potentially on the gross margin side, wondering what we should expect for non-GAAP SG&A and R&D? Is that expected to be flat as well, or is there any potential to see some additional reduction there?

[Bill Lowe:]

First, let's go back to the revenue target. The revenue target we forecasted this quarter is $185 million to $190 million. The forecast last quarter was $180 million to $185 million, so there is an incremental pick up in the range on the revenue side. So, take that into account, one. On the SG&A side, I said SG&A will probably run between $22.5 million to $23 million this next quarter is where we're forecasting it from a OpEx standpoint. R&D will be relatively flat quarter-to-quarter. So, it's just that, it's little bit of slight increase on the SG&A side in the next quarter.

[Ana Goshko:]

Then secondly wanted to ask, I think last quarter, the company disclosed that there was a bond repurchase authorization, and I don't think I see anything in the financials that showed that you bought back any bonds. I know it's a seasonally weaker quarter for free cash flow, so just wanted to understand, what your approach to potentially buying bonds is?

[Bill Lowe:]

Well, first of all we actually did buy, as I mentioned in my formal remarks. We did buyback from a face value perspective we bought back $2 million, which is not a lot.

[Ana Goshko:]

Okay. That's fair. Thank you.

[Bill Lowe:]

And the Board has authorized up to $20 million, and of course we will be opportunistic about doing this. And so, I can't -- let say and what how that will scale. But we continue to have the authority to do that up to $20 million of our cash balance.

[Ana Goshko:]

Okay. And then, just a couple of more things. So, it's a small item, but I still see that the company at least in its non-GAAP adjustment is adding back the ERP integration expense, and just wondering, when that process is expected to end?

[Bill Lowe:]

This is the last fiscal year that will affect. We should see it start to trail off as we get towards the end of the fiscal year as the R12 upgrade gets completed across the globe.

[Ana Goshko:]

Okay. And then finally, just you know on NEC, I know you are continuing to say that you are impatient but being patient as they -- as the entity works through the jurisdictions. But just to be clear, are you waiting for everything to be sort of -- kind of a seal deal in all of those jurisdictions, or is there a point where you are going to have potentially just enough comfort, or can get some kind of indemnification if you don't have to wait until every sort of paper is signed in every jurisdiction?

[Per-Olof Loof:]

You know I think that's something that we are discussing and reviewing as more information becomes available. And clearly, we know a bit more than we can actually talk about actually would expect. So we will be reviewing that on a monthly basis basically to see when we feel comfortable enough to go forward. And I can't really say much more than that, but we've made -- making a statement that we believe we are going to conclude this in this fiscal year, should send a pretty strong message as to what we think is likely to occur.

[Operator:]

[Operator Instructions] And at this time there are no further questions.

[Per-Olof Loof:]

Thank you all for joining us this morning. And we're looking forward to Q2, and as I said we expect slightly uptick in revenue, continued margin improvement and we're looking forward to working this through the year. And of course as I said, we're looking forward to getting on with the NEC merger as well. So with that, thank you very much and have a great day.

[Bill Lowe:]

Thank you.

[Operator:]

Thank you. This does conclude today's conference call. You may now disconnect.