KraneShares Dynamic Emerging Markets Strategy ETF
Q3 2015 Earnings Call Transcript

Published: 29 Jan 2015

[Executives:]

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

[Analysts:]

Matt Sheerin - Stifel Marco Rodriguez - Stonegate Securities Ana Goshko - Bank of America Merrill Lynch

[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 the KEMET Reports Fiscal 2015 December Quarterly Results Conference Call. 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 like to turn the call over to Richard Vatinelle, Vice President and Treasurer.

[Richard Vatinelle:]

Thank you, Stephanie. Good morning and welcome to KEMET’s conference call to discuss the financial results for our third quarter of fiscal year 2015. Joining me on the call today is Per Loof, our Chief Executive Officer and Bill Lowe, Executive Vice President and CFO. As a reminder to you, a presentation is available on our website that should help you follow along with the financial portion of our presentation. Before we begin, we would like to advise you that all statements that address 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 involve a number of risks, uncertainties and assumptions. Please refer to our 10-Ks, 10-Qs and registration statement filings for additional information on risks and uncertainties. Now, I will turn the call over to Per.

[Per-Olof Loof:]

Thank you, Richard and good morning everyone. Q3 was an exceptional quarter in many respects. KEMET, like many global companies, fought the uphill battle of a strengthening dollar against the euro and other currencies, but in spite of the euro impact and a forecasted decline in distribution revenue and performance exceeded our expectations, where it really counts at the bottom line. We did comment last quarter that our gross margin improvement was essentially a quarter ahead of our expectations. And by that, we expect it to be able to hold that level for the third quarter. I am pleased to say that our expectations were exceeded as our gross margin continued to improve over prior quarter by increasing 90 basis points to 22.4% and that helped to generate an additional $1.3 million of operating income over the prior quarter on $14 million less revenue. If we compare to Q3 a year ago, our EBITDA performance of $27.2 million improved $4 million on $6 million less revenue. Non-GAAP EPS this quarter of $0.13 per diluted share was an improvement of $0.06 over the prior quarter and up $0.11 from Q3 one year ago. Clearly, the efforts that have taken place to lower our cost of production across the globe are truly being reflected in our financial results this fiscal year. I know that it’s been a long road for both our investors and our employees as we maneuvered through the various minefields over the past year or more. So, it is good to see that we are able to notice that these efforts really are now paying off. We have more work to do of course to complete in our F&E business and in Europe, but it appears that even the Europe now remains a challenge through this calendar year we see good light at the end of the tunnel. I will address some additional actions for the F&E business a bit later in my remarks. Let’s briefly look at our market segments before I turn the call over to Bill to review the financials in more detail. Looking at our market segments compared to last quarter, telecom was up as a percentage on flat dollar basis quarter-to-quarter. Medical and defense was also essentially flat. However, defense was a larger contributor to the segment this quarter. Computer, consumer, industrial were essentially flat and automotive declined compared to the prior quarter. We continue, however, to see positive momentum in our automotive business. The decline is to a large extent due to the euro and one customer that produced more in calendar three in order to be ready for Christmas. From a channel perspective, distribution revenue was down about $6 million as our distribution friends continued to work our inventories down. OEM was down $8 million compared to the previous quarter again mainly due to the euro and weakness in the European industrial market. EMS was up as a percentage of revenue and on flat dollars compared to the prior quarter and continues to be driven by strength in our telecom business. I am now going to turn it over to Bill to go through the numbers in more detail and come back with you with some additional colors on the business. Bill?

[Bill Lowe:]

Thanks Per and good morning. Before I review the actual raw numbers, I would like to first discuss a couple of additional positives that the company accomplished during this quarter. First, we renewed our bank revolver. And although we filed an 8-K with the relevant details, I am going to give you just a few key terms this morning. The principal terms on the renewal as the facility increased to $60 million from $50 million. There is an additional accordion feature of up to $15 million. The expiration date is moved to December of 2019. Our collateral base remains essentially unchanged and interest margin improved by 50 basis points. In addition, the fixed charge coverage ratio covenant lowered to 1 to 1 versus 1.1 to 1. So please refer to our 8-K that was filed related to our revolver renewal for all the details on that renewal. Second, at KEMET’s election, we opted to pay off the loan related to our OEM transaction. The balance of this loan was approximately $17.2 million. We used $1.2 million of our cash in the bank and $16 million was drawn against our revolver prior to the close of the quarter. At December 31, the loan balance with the OEM therefore was zero and any minimum cash balance requirements as a part of that contract have been eliminated. Third, KEMET made the final payment of $7.7 million on our Niotan acquisition on January 2, which completes the deferred payments related to this transaction. If you recall Niotan was the tantalum powder company we acquired as a part of our overall strategy to vertically integrate our tantalum supply chain. Now, let’s get back to the financial results of the quarter. And I will begin my remarks on Slide 4 if you are following along the slide deck that’s in the website. As a reminder prior period results included in this presentation have been adjusted to reflect discontinued operations. Net sales of $201.3 million were down 6.5% compared to the prior quarter of September 30 of $215.3 million and down 2.9% compared to net sales of $207.3 million for the quarter ended December 31, 2013. Currency fluctuation accounted for $3.3 million of the 1.6% or 1.16% compared to the prior quarter and $4.1 million or 2.1% compared to the quarter ended December 31, 2013. Our non-GAAP gross margin as a percentage of sales increased 90 basis points to 22.4% compared to 21.5% in the prior quarter and our non-GAAP net income was $0.14 per basic share and $0.13 per diluted share and adjusted EBITDA for the quarter was $27.2 million, up from $25.9 million for the prior quarter ended September 30 and significantly up from last December of $23.2 million. Our GAAP net income for the quarter as stated back on Slide 3 was $0.07 per basic share and $0.06 per diluted share. On Slide 7, the total cash expenditures during the quarter were $5.5 million. Our expectation for the full year remains unchanged in the range of $20 million to $25 million for CapEx. Next quarter therefore will be similar in range to this quarter of $6 million to $7 million. Unrestricted cash in the bank at December 31 was $55.6 million, up from $51.6 million last quarter. Included in cash payments this quarter was our semiannual interest coupon on the senior notes for $18.6 million and our repayment of $1.2 million against the outstanding balance due to the OEM that we discussed just a few minutes earlier. As I said earlier we have completed the pay-off of that loan and subsequent to our quarter we also made the last payment on our Niotan acquisition of $7.7 million and that completes those acquisition payments as well. Regarding the performance of NEC TOKIN, revenue in quarter three came in at $115.1 million and EBITDA for the quarter was $13.6 million on a U.S. GAAP basis. Our share of their net income was $1.4 million and their cash balance remains healthy at $98.9 million. Now I will turn the call back over to Per to discuss the markets and our business units. Per?

[Per-Olof Loof:]

Thanks Bill. Now let’s discuss first our solid capacitor group performance for the quarter. Revenue versus the prior quarter was down $10.2 million or 6.3% to $152.8 million, mainly driven by weakness in the distribution channel impacting MnO2 revenues and some slowdown in OEM and EMS ceramics business. However, our cost performance for the quarter offset the drop in revenue as gross margin improved by 160 basis points driven by our continued vertical integration efforts in the tantalum product line and an improved product mix in our specialty areas. Specialty products were up again this quarter over the prior quarter and reflects seasonal purchasing by certain customers that will not repeat in Q4. This was another very solid quarter from this business group. Our Film and Electrolytics Business revenue decreased to $48.5 million from $52.3 million last quarter. Revenues were impacted by a weakening euro and softness in the industrial and green energy segments. Gross margin was down 170 basis points versus last quarter. As we have said before, Europe in general continues to be sluggish and the timing of its recovery remains somewhat uncertain. Until then, we will continue to focus our efforts on improved cost performance and revenue margin recovery. We have several cost improvement actions remaining within the F&E business over the course of the next 12 months that are primarily headcount driven eliminating two additional manufacturing locations that are reducing our headcount by around 300 positions mainly in high cost countries. We expect to see savings from these actions to begin already in the next quarter and in the first quarter of fiscal ‘16 of approximately $5 million that will build to that number by Q4 of fiscal ‘16. As Bill pointed out, NEC TOKIN did really well and turned in another profitable quarter. I am pleased to see that NEC TOKIN is ahead of our schedule and this is really very nice to see. Before I get into the regions, let me just share with you our overall progress in calendar 2014 and compare that performance to a year ago. Sales in calendar 2014 was $845 million, up $28 million compared to calendar year 2013 of $817 million and EBITDA for calendar year 2014 is $94 million, up from $62.5 million in calendar 2013. And now to our regions, in EMEA, the revenue for Q3 was $67.4 million, down 3.7% from last quarter. The decline was driven by lower shipments through our distribution channel as they continue to make adjustments to their inventory levels. The overall market was flat to down compared to last quarter and we saw some pricing pressure, in particular, at large OEM customers in the automotive and industrial segments. The euro decline that affected us this quarter will again affect us this coming quarter on the top line and then primarily for the F&E business. But since we do enjoying almost natural hedge in that segment and to a large extent on both revenues and bottom line, it won’t affect either groups that much from a bottom line perspective. However, the strong dollar against the Mexican peso will also provide some offset to the impact on earnings of the euro decline against the dollar, particularly in the solid capacitor segment. Looking ahead to next quarter, we do expect to see some recovery from the December slowdown in the automotive sector. In the Asia-Pacific region, revenue was down 4% quarter-over-quarter to $70.2 million. However, distribution POS was up $1 million from the previous year. China manufacturing PMI slowed down as many of us know in Q3 and job shutting persists. The 2015 calendar year outlook is positive, but with limited growth. It will continue to focus our efforts on improving our margin performance. Q3 revenue in the Americas region finished down over the quarter, $63.7 million versus $72.2 million. However, variable margin increased from 56.7% to 61.5%. As anticipated, we saw our POS flat this quarter. Looking ahead, we expect to complete the year over plan and for POS to remain flat to slightly up. Distribution promotions are being implemented to drive inventory out of the channel. Despite the slight decline this quarter, we do expect a healthy pick up again in the beginning of our fourth quarter. To sum up the quarter, we could not be more pleased with our metrics, even with the headwinds that Europe has presented, performance continues to improve and our industrial and automotive businesses are expected to pick up in the fourth quarter. The strong dollar will continue to have a top line impact of course on our financial results, but we will continue to work to generate a positive and improving bottom line. I will conclude with the remarks about our forecast for next quarter. Sales are currently forecasted to be slightly up within the range of $202 million to $208 million. We are currently ahead of last quarter in terms of bookings and on par when it comes to shipments. Given the fact that Europe really got a late start in 2015 due to where the holiday calendar turned out this year, this in my opinion is a pretty good sign. Our book to bill is today 1.27, and solid caps and F&E both at 1.27. However, an unpredictable Forex situation mainly the Europe, of course, could negatively affect this range. Even with the euro uncertainly, we will predict Europe to be up compared to Q3. The other regions will be more flattish. And of course, the Lunar New Year will take 7 to 10 days out in China, as we all know. A mix change less of specialty business in the solid capacitors group may have an impact to gross margins temporarily, thus overall gross margins may fall slightly for this group. However, F&E will improve some, and this will to some degree offset the solid capacitors business group. As always, thanks to our hard-working employees that continued to make the extra effort to improve our performance and enhance our customers’ experience. And this concludes our prepared comments and we will be happy to respond to any of your questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Matt Sheerin.

[Matt Sheerin:]

Yes. Thanks. Good morning, guys. First question just regarding your comments Per related to the solid capacitor margins, why would they be down a little bit this quarter?

[Per-Olof Loof:]

Because of the mix, so the mix – there is a mix change from Q3 to Q4, that’s really the only reason. So, we had a – we have a better, we have more specialty products going out in Q3 than we have in Q4. So that’s why it will be down.

[Matt Sheerin:]

Okay, that’s helpful. And would you expect selling to distribution to be up this quarter or are they still working down inventory?

[Bill Lowe:]

I will expect sales of distribution to be up compared to last quarter, but I still expect them to work inventories down. But they will be up compared to Q3.

[Matt Sheerin:]

And you expected that the sell through or POS to be up, right?

[Bill Lowe:]

Exactly.

[Matt Sheerin:]

Okay. And in terms of the nice margin improvements you have seen, it sounds like last quarter the tantalum supply chain actions have helped. Where are we there, are we basically done with all of those initiatives and what’s left in terms of margin expansion in that sort of flattish growth environment?

[Per-Olof Loof:]

We are not done. We are – we did about not quite 70% of our tantalum requirements through our own initiative this quarter. As you know, our objective is 80%, 85% as we have said before. So, we are working to get to that level. And we are now at a point where we are working on the R&D side to make that happen. And we expect fully to be able to realize our objective of getting to an 80% of our total requirements of our own channel – our own supply chain. So we have more to do.

[Matt Sheerin:]

Okay. And what about the manufacturing shifts in Europe related to the F&E business, is that complete?

[Per-Olof Loof:]

No, it’s not complete. We have – as I said, we have two more plants to shut this year. And we have a net of 300 people going out. So we have 300 people net going out. Of course, there is more going on in high cost countries and some coming in, in lower cost regions. So we have two plants to shutdown and resources in about four countries to come out. All scheduled, all approved, all agreed with unions that will happen over the next 12 months.

[Matt Sheerin:]

And what are they expected restructuring charges Bill related to that and how much of that would be cash?

[Bill Lowe:]

We have– we expect that to be about $13 million and $9 million of what are already accrued for.

[Matt Sheerin:]

Okay, great. And then just lastly for me on regarding NEC TOKIN, any update there in terms of the transaction?

[Per-Olof Loof:]

No, I think we continued to see good momentum in NEC TOKIN as we reported. Their gross margin is really improving nicely. We have been to start some of the restructuring efforts that are required going forward and that has commenced, and also helped the bottom line. And we are pleased to see that they actually are making money and that was a long time ago. And they would be continuing to make money over several quarters now and we expect that to continue. And as I said before, we – regarding the investigations that are ongoing, we expect to have clarity on what that will – that would entail in about 3 to 4 maybe at the outset 5 months at which time we would know what action to take.

[Matt Sheerin:]

Okay, great. Thanks and good luck this year.

[Per-Olof Loof:]

Okay, thanks.

[Bill Lowe:]

Thanks, Matt.

[Operator:]

Your next question comes from the line of Marco Rodriguez.

[Marco Rodriguez:]

Good morning guys. Thanks for taking my questions.

[Per-Olof Loof:]

Good morning.

[Marco Rodriguez:]

Just wanted to talk a little bit more on the gross margin side, the sequential improvement obviously impressive once again, can you kind of rank the improvement that you saw there sequentially or year-over-year as it pertains to the vertical integration, the F&E restructuring and any other mix issues?

[Per-Olof Loof:]

I mean, I will let Bill chime in as well, but I think it was a combination of an ongoing effort to increase our specialty products and that has happened in both our ceramics and our tantalum business, which improves the mix and improves the margin of course. And that’s one point. The vertical integration efforts continue to bear fruit and we continue to see improved performance from that initiative. And our annualized – we said last quarter that our annualized savings now is around $53 million and maybe it’s even a little bit more this quarter when you added up. So, we have got some more there. And then of course, the cost – the take out of the cost in F&E is also contributing and we will see as I said as these plants are finally shutdown and the people are coming out, all of which are scheduled and agreed and approved and all the rest are with representatives of the employees, whether that be workers’ councils or unions as it may. Those will continue to yield an improvement. And we at the end of next fiscal, i.e., a year from now that should be in the $5 million a quarter range. I don’t know Bill you want to add something.

[Bill Lowe:]

I think you have covered it.

[Marco Rodriguez:]

And I am sorry I didn’t catch that last part, what was the $5 million per quarter range what was that against?

[Per-Olof Loof:]

That’s the remaining restructuring efforts meaning we are not moving much now. We are shutting things down and the people are exiting. So, that will happen over the next 12 months and that will start to gain – we will start to see the results of that already next quarter, but when that’s all done by the end of December this year that will be a $5 million improvement to our cost performance in F&E.

[Marco Rodriguez:]

Got it, okay. And I think recently in a presentation that you did at a conference, you are talking about an additional $15 million or so of cost savings from F&E, $2 million of which was to be headcount. So, is it fair to assume that the remainder of the delta is these two other plants that are shutting down this year? And can you give us sort of timing on when those plants are going to be shutdown or moved?

[Per-Olof Loof:]

Yes. One is I can’t really do that for a number of reasons, but one will be probably a shutdown in the next several months and one maybe a little towards the end of the year. It has to do with how – with our customer commitments and the discussions with the customers are affected as to how we will continue to build buffer stock and continue to service them. That’s really what – the timing is a little bit unclear, but they will definitely be done by the end of December and one will be done within the next 4 months.

[Marco Rodriguez:]

Got it. And I didn’t quite catch couple of items I think you guys were talking about the ForEx impacted about $3 million, was that a sequential number impacting revenues, a year-over-year number?

[Bill Lowe:]

Yes. In this quarter, I think we were – Per was mentioning numbers from a combined business group standpoint, it’s about call it $4.5 million top line impact with $2.5 million or so on the bottom line when you combine the two business groups together.

[Marco Rodriguez:]

Okay, got it. And then just last quick kind of housekeeping item once again, I didn’t quite catch it, but the OEM debt or balance that you paid off, that was post December quarter correct…

[Bill Lowe:]

That was actually during the month. It was early in the month of December, we decided to as I said earlier get KEMET’s election. We did that during the quarter of the December quarter.

[Marco Rodriguez:]

You did, okay, that was during the quarter, okay.

[Bill Lowe:]

So, if you look at the balance sheet, you will see that short-term debt has decreased fairly substantially, because that shifted from the – it would have – there was a bullet payment due in June under that contract of this year. So it was sitting in short-term debt and that’s been moved out of that area.

[Marco Rodriguez:]

Got it. Okay. Thank a lot guys.

[Per-Olof Loof:]

Thank you, Marco.

[Operator:]

Your next question comes from the line of Ana Goshko.

[Ana Goshko:]

Hi. Thanks very much. I have just a couple of questions. So on the retirement of that OEM balance, were there any impetus to doing it before the June deadline?

[Bill Lowe:]

Well, we – really when it comes down Ana is because as you know every time – every quarter we have a conversation with you and our investors and there is always this conversation about that issue. We thought it was a very big positive and still believe it’s a positive of the contract we entered into and the business that we are doing with that OEM. However, it’s created a lot of noise and we decided it’s easier to just to clear it off – clear the deck and eliminate the noise that surrounds that issue. And this should be the last time we all have to talk about that debt and the contracts surrounding it in any criteria that we are subject to under that contract. So it’s all been taken care of.

[Per-Olof Loof:]

But I think it’s fair to say that the fact that we entered into that arrangement have helped our business with that particular customer immensely and more than doubled the business we have there now for what we had prior to the contract. So it was all-in-all a very good thing, but as Bill said there was a lot of noise and we had to explain why this was and why not and why it was good and why it was not bad or whatever. And so we decided let’s just get rid of it, so we get that discussion off the table.

[Ana Goshko:]

Okay, got it. And then as you mentioned that contract did require that you maintain a pretty high minimum cash balance, which I think you have said in the past was much higher than, well I don’t say much, but was higher than you may have carried just to run the business. So, wondering now that that requirement has gone, do you feel that you are running with too high cash balance and might we see that come down?

[Bill Lowe:]

I think that our efforts are always on cash flow and actually to build – over time build our cash balance. There are some needs for over the next fiscal year cash – as Per mentioned about various severance payments etcetera. But I do believe that at the pace at which the performance of the company is today and the CapEx levels that we have indicated we tend to run out over the next fiscal year and we have indicated that we expect next fiscal year to look very similar to this fiscal year to round that $20 million to $25 million number. That – over the course of the next fiscal year, which begins in April we would still expect to see our cash balance build up. And we of course would like to then as we use some of that we would see some of our revolver balance go down. So it’s – we would relieve some of the debt that we have got on our revolver balance and still build some cash is the goal.

[Ana Goshko:]

And then…

[Per-Olof Loof:]

If you look at just the Niotan payments, the payments for the powder plant that we acquired as part of our vertical integration efforts over the last 12 months we have paid them $27.7 million out of operating cash.

[Ana Goshko:]

Got it.

[Per-Olof Loof:]

That’s over too.

[Bill Lowe:]

That’s done now as well.

[Ana Goshko:]

That’s done now as of January. So and then what is the revolver balance as of the quarter end?

[Bill Lowe:]

Now at the quarter end it would have been – just a minute, I am going to put together a couple of numbers, $46 million.

[Ana Goshko:]

Okay, that’s pretty clear. And then…

[Bill Lowe:]

As today’s balance, it’s probably about $34 million.

[Ana Goshko:]

So, you paid it out since quarter end.

[Bill Lowe:]

Yes, I paid it down.

[Ana Goshko:]

Okay. And even with the Niotan you were able to pay that down. Okay. And then – so and then on the F&E restructuring plans this year, so just to be clear it is incremental to what you most recently talked about. So I think in the past you talked about kind of being done by mid-calendar year ‘15 and now there is some incremental that’s going to take, if that’s going to go on until the end of the year, is that accurate?

[Per-Olof Loof:]

That’s correct, we have been able to rationalize a few other things. And also we have had some increase in demand that in one particular facility which will require us to keep that that facility in this current place for a few additional months may be up to 5 months longer. So that’s also why it’s going to take longer. But also we have found more. So we are looking – we have been talking about an additional 15, I guess now we are talking about additional 20 on an annual basis.

[Ana Goshko:]

Okay. And then I think you talked about the restructuring expenses that you expect to accrue and already accrued. What is the cash restructuring cash that you expect to payout in I guess in the calendar ‘15?

[Per-Olof Loof:]

$13 million.

[Ana Goshko:]

$13 million.

[Per-Olof Loof:]

Calendar ‘15 $13 million.

[Ana Goshko:]

Got it.

[Bill Lowe:]

Yes, that would be for the whole fiscal year.

[Per-Olof Loof:]

Yes, maybe – sorry, maybe the whole fiscal year.

[Bill Lowe:]

All the way through March of the following year about $13 million.

[Ana Goshko:]

Okay. And then all-in on the F&E business for this next either five quarters or the calendar year, is the business running cash flow neutral or if you take the restructuring costs and everything else, there is still sort of weak margins, are you burning cash in that business?

[Bill Lowe:]

At the current rate of what we reported, for instance, this quarter, it’s probably fairly breakeven on cash counting in those payments going out the door. Of course, as we spend that money and Per said it’s mostly headcount driven, so we start to see the savings associated with those payments relatively quickly. So, it starts to have a fairly quick payback and then the cash they would then become a cash contributor rather than being cash neutral fairly quickly during the next fiscal year.

[Ana Goshko:]

Okay. Because I know in the past you have said, if you really couldn’t get that business to a positive ROI, you think about whether it made sense to retain it. So, I guess with your vision now, is that still something that you think about or are you confident that you are going to get to the appropriate return for that business?

[Per-Olof Loof:]

We believe that we will get to an appropriate return for this business, but I guess as with anything, we will review everything as we look at things going forward. And we don’t take anything off the table, but having said that, we do believe that the current action is underway on both the revenue side and the cost side as we spoke about specifically here. We believe that business will be a positive contributor as it was in the past.

[Ana Goshko:]

Okay, great. Okay, thanks very much.

[Per-Olof Loof:]

Okay, thanks Ana.

[Bill Lowe:]

Thanks, Ana.

[Operator:]

[Operator Instructions] Your next question comes from the line of Jacob Muller [ph].

[Unidentified Analyst:]

Good morning. Thanks for taking my questions. The $20 million that you talked about on an annualized basis that’s all on the F&E side, that’s coming from the solid capacity side as well?

[Per-Olof Loof:]

That’s all from the F&E side. That’s $5 million a quarter is all from the F&E side.

[Bill Lowe:]

And that to the Per’s earlier, it does – it builds throughout the year. So, the run-rate at the fourth quarter is $5 million a quarter.

[Unidentified Analyst:]

Right. So, that would take margin in the F&E up to around 10% from where – from flattish to marginal right now?

[Bill Lowe:]

It will – if you look at, it will take margins up to $2 million, you add another $5 million to the bottom line and that’s kind of where we are at and some other actions too going. So, we will expect that business to generate about 10% operating line.

[Per-Olof Loof:]

Yes. And I think we didn’t talk about the revenue side, but I think we have said in the past in presentations that our goal of course is to create more revenue top line and get that business starting with a $6 million on the top side. We are not there of course, but it reported $8 million this quarter, but that’s the other side of the equation is after the cost structure is in line is to make sure that we are actually generating more revenue, which will drive the – will help drive the margin up higher than the 10%.

[Unidentified Analyst:]

And what kind of contribution is there on that incremental revenue?

[Bill Lowe:]

It will run – it will actually be better, because it will all be placed in facilities and have a lot better margins than we used to have, because it will be all.

[Per-Olof Loof:]

In the newer facilities and in countries where the cost structure is more positive for us.

[Unidentified Analyst:]

So, long-term when you think about the F&E business, what kind of margins are you targeting?

[Per-Olof Loof:]

Well, we are targeting a business that would generate a 10% operating margin just so that’s really what we are looking to do, maybe even a bit more than that actually.

[Unidentified Analyst:]

So, I mean, if I am hearing you correctly, I mean, right now the business is running at around $110 million EBITDA run-rate give or take and it’s happening even in the weaker quarters we are running at that level. So, putting out the $20 million on top of that, we are probably looking at like $130 million EBITDA business and which we throw off even with the restructuring and the CapEx that you have stated there will be a lot of additional cash and you mentioned you were looking to pay down debt. What is the debt leverage ratio that you expect that you are comfortable at the company at which point you feel that the company is where it should be? And perhaps the stock would be given a little more attention at these levels, I mean, obviously the stock is very depressed and is not reflecting the improvement in the company. And would you consider buying shares at this level relative to paying down debt?

[Per-Olof Loof:]

We are not thinking about buying back shares at this point even though you could argue that’s a good deal, but we would like our ratio to start with the 3.

[Unidentified Analyst:]

Right. At 1.30 ratio your ratio was pretty much at 3, I mean, on a net basis, it will be below that, so…

[Per-Olof Loof:]

That’s true.

[Unidentified Analyst:]

That seems to be kind of baked into the cake right here and you are looking at stock with free cash flow well over $1 trading at $4. I mean, why would you not be buying back stock at this level?

[Bill Lowe:]

Well, at this point we talked earlier about cash and cash needs this year and starting to build up our cash balance. I think it’s important that the company before we run out and spend – first of all, there is a limit. I will say that under our current bond issue, there is a limitation on how much stock we could buyback and it’s actually at a level that would not move the needle enough to make it worth using the cash to do that. So, that’s factor number one. So, before we would actually be able to entertain that and have to be underneath the different bond indenture that we would enter into in the future. And then secondarily even without that what I am saying is that I think the company needs to make sure that we are positioned by paying down some of our revolver building some cash before we decide to take a huge chunk of that. That’s significant enough. I mean, when you buyback stock if you are not going to buyback enough, it’s not going to really do anything to the stock price. So, although I agree that at certain price level, it makes – it makes financial – our economic sense to do that, but you need to do enough that actually moves – we will move the stock. And I don’t think we are in a position a) to do that, number two under our bond indenture we can’t do that. So, we are really prohibited at the moment from doing that under our current terms.

[Unidentified Analyst:]

So, I guess that brings up the last point. I mean, obviously you guys tried to refi recently and I am sure you continue to look at that. I mean, what is it do you think that held back the company from getting that refinancing transaction done? And is the improving metrics underlying the company obviously the market is a little tighter, but as the company continues to perform, when or do you see it happening and if so at what point later this year potential refinancing of the debt?

[Per-Olof Loof:]

Well, it’s hard to tell when we will go out, but clearly it’s our objective to do refinancing. As we said, we have tried to do it in November and that was an opportunistic type of an approach. We didn’t have to do it. And when we looked at what we will get or at the rates we were getting, it didn’t really make any sense to go do it. So, we weighted also the call premium, it is a lot less from May going forward. So, that also entered into our thinking. So, clearly refinancing is on our agenda and when the time comes when we believe it’s the right thing to do. That’s exactly what we will do.

[Unidentified Analyst:]

And one last question on the NEC TOKIN, I mean, is there any inkling as to the direction that’s moving as far as the investigation? And are you feeling more positive about [indiscernible] transaction than you were perhaps a couple of months ago or similarly?

[Per-Olof Loof:]

Two things, we are very positive towards the transaction given the fact that we think it will add a lot of value to our shareholders. It will redefine KEMET to a large extent than we will be. We will have a much more diversified product portfolio. We will have access to markets we currently do not serve. So all-in-all, that is a very good thing for the company. Having said that, we need clarity and we expect that clarity to – we hope we can have that clarity over the next 4, 5 months.

[Unidentified Analyst:]

So, just a question on the sides of the liability, if any?

[Per-Olof Loof:]

As I said, we need clarity.

[Unidentified Analyst:]

Thank you very much.

[Per-Olof Loof:]

Thank you.

[Bill Lowe:]

Thank you.

[Operator:]

[Operator Instructions]

[Bill Lowe:]

Okay. Operator, if there is no other calls…

[Operator:]

There are no further questions at this time.

[Per-Olof Loof:]

Okay. Well, thank you. Thank you from Bill and myself. Thank you very much and we hope you have a good day and we will talk to you in three months’ time again.

[Bill Lowe:]

Thank you.

[Operator:]

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