KraneShares Dynamic Emerging Markets Strategy ETF
Q1 2015 Earnings Call Transcript

Published: 24 Jul 2014

[Executives:]

Richard Vatinelle – Vice President and Treasurer Per-Olof Loof – Chief Executive Officer William M. Lowe Jr. – Chief Financial Officer, Executive Vice President Wilfried Backes – Director

[Analysts:]

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc. Hamed Khorsand – BWS Financial, Inc. Marco A. Rodriguez – Stonegate Securities, Inc. Ana Goshko – Bank of America Merrill Lynch Wamsi Mohan – Bank of America Merrill Lynch Owen Douglas – Robert W. Baird & Co. Kevin Kuzio – First Eagle Investment Management

[Operator:]

Good morning. My name is Lindsey and I will be your conference operator today. At this time, I’d like to welcome everyone to KEMET’s 2014 Quarterly Earnings 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) Mr. Richard Vatinelle, Vice President and Treasurer. You may begin.

[Richard Vatinelle:]

Thank you, Lindsay. Good morning and welcome to KEMET’s conference call to discuss the financial results for our first 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 the risks and uncertainties. Now, I will turn the call over to Per.

[Per-Olof Loof:]

Thank you, Richard and good morning everyone. Simply put, our Q1 performance is on schedule. Margins came in as per plan, allowing operating income to improve almost $1 million from Q4 with the revenues down approximately $3 million from the previous quarter. If we compare to Q1 a year ago, our EBITDA performance improved $11.2 million. I believe that the trend that we’ve seen for several quarters now, we’ll continue. And we can expect further improvements in the quarters to come as cost actions, restructuring measures in operations, and our investment in vertical integration makes the way to the bottom line. It seems that business conditions continue to remain pretty steady with the elusive expectations of economic improvement for the second half of the calendar year. Our first fiscal quarter of 2015 does reflect that fact. Revenue for the quarter was, I said, down slightly compared to our prior quarter at March 31, but came in within our forecasted range and came in at $212.9 million. We did forecast the range between $212 million and $215 million for the quarter. More importantly, however, as we have communicated to you several times now while our expectation is for generally flattish revenue, we expect continuing improvements in our margins. To this end, we are pleased to report that our margins increased 40 basis points to 18.1% from 17.7% the prior quarter. And we believe that we’ll see more improvement in our margins in the quarters ahead. We saw relative good strength again this quarter especially in automotive, medical and telecom with the industrial base being relatively flat quarter-over-quarter. From a channel perspective, the distribution revenue was down about 5% from our previous quarter. However, POS increased in both the Americas and Asia while declining slightly in Europe. The investor increased approximately 7.5% driven by strength in automotive, industrial and telecom. And our OEM business was flat quarter-over-quarter, but with automotive and medical remaining healthy. We think we continued POS strength is a good sign and that our distribution sales will remain healthy. We believe that the change in this quarter represents only minor adjustment to distribution inventories. Globally POS continued to increase at the rate of 2.2%. More later when we discussed the business groups and regions, but overall we’re happy with the start of our fiscal 2015 and as we see ourselves on the glide path that we have established for the recovery of our financial performance. And now I’ll turn it over to Bill to go through the numbers and come back to you with some more detail after Bill. Bill?

[William M. Lowe Jr.:]

Thanks, Per, and good morning, everyone. As usual, I’ll begin my review on Slide 4, if you’re following along in the Slide deck. I do want to remind you that the profit results include the presentation that have been adjusted to reflect the discontinued operations, as you recall the film and electrolytic business group dispose of its machinery unit. Net sales at $212.9 million were down 1.4% compared to the prior quarter of March 31 of $215.8 million and up 5.3% compared to net sales of 202.1 for the quarter ended June 30, 2013. Our non-GAAP gross margin as a percentage of sales increased 40 basis points to 18.1% compared to 17.7% in the prior quarter. And a non-GAAP net loss was $0.04 per basic share and diluted share, and adjusted EBITDA for the quarter was $20 million, down slightly from $20.9 million for the prior quarter ended on March 31, but as Per said, up dramatically from the last June of $8.8 million. I’ll point out to you as Per said that the operating income was up about a $1 million this quarter. And last quarter, our income tax was a credit due in part to many tax law changes around the globe. This quarter taxes were more normal and reduced our net earnings as would be of a more normal glide path for the tax rate. This accounts were not just the difference, but the difference between our EPS last quarter and EPS this quarter even offsetting some of that operating income that was up a $1 million. So just pointing out that the tax rate really is the major difference quarter-to-quarter when you compare the numbers. Our GAAP loss for the quarter, as stated back on Slide 3, was $0.08 per basic and diluted share. Moving forward now to Slide 7, the total capital expenditures during the quarter were $5.2 million and our expectation for the full year remains unchanged in the range of $20 million to $25 million for CapEx. Next quarter could be in the range of between $5 million and $8 million. Cash in the bank at June 30, was $71.6 million, flat from last quarter of $71.4 million. Like to conclude my comments with just a few remarks about NEC TOKIN’s financial performance. We continue to be pleased with the progress at NEC TOKIN. Revenue in Q1 came in a $122.4 million and EBITDA for the quarter was $13.2 million. Our share of the net loss was $1.7 million and their cash balance remains healthy at $103.9 million. Now, I’ll turn the call back over to Per to discuss a few of the markets in our business units.

[Per-Olof Loof:]

Yes. thank you Bill. Let me start with our solid capacitor group revenue. Our revenue was down slightly $3.5 million versus the prior quarter and driven primarily by distribution and also military sales within the ceramic product line. However, even with the decrease in sales revenue, gross margins improved by 20 basis points driven by our tantalum product line continuing to provide benefit from our vertical integration efforts. The ceramic product line was impacted by the revenue and mix changes as I stated earlier. Our margins continued to remain within our targeted range. This was another solid quarter from this business group with more margin improvement to come. Our film and electrolytic business group revenue increased slightly to $53.1 million from $52.5 million last quarter. The increase is attributable to OEM business in EMEA primarily in the automotive segment. Industrials remain more or less flat quarter-over-quarter. Margin did increase attributable to the cost reduction actions beginning to show up in our financial results. Gross margin was up 1.5% this quarter over last. As I said in our last call, I expect the F&E operating performance to improve throughout the fiscal year and beyond as our plant consolidation effort is complete, and our team is focused on developing and designing new products for our customers and increasing our plant efficiency. Next quarter will be a bit of a challenge from a revenue perspective as we roll into the summer vacation periods in August in Europe, but overall the general trend for this year is the expectation of a continuing improvement in bottom line performance by this group. And now to our regions. In EMEA, the revenue for Q1 was $77.2 million, which was a decrease of 2.9% over the previous quarter after a substantial increase of over 17% last quarter, we were not surprised to see a slight decline. This decline was driven by lower shipments to our distribution channel as they made slight adjustments to their inventory levels, although the U.S. sales continued to hold at a healthy level. During the quarter, automotive demand continued to increase and this market remains very healthy. The industrial segment remained stable, but we are beginning to see early signs of growth returning to that market. Today, bookings in EMEA across all channels have been very strong as we currently have a very healthy book-to-bill. One must note, however, that this is not unusual as European customers tend to put their orders in early since August is a big vacation period. In the Asia-Pacific region, component sales were up 5.3% quarter-over-quarter to $69.7 million. The increase in revenue was driven by increased demand from distribution EMS and OEM channels. Our Asian POS continues to improve and we will finish Q1 up 10%. The automotive and telecom segments experienced improving demand throughout the quarter and we’re encouraged by the demand increases coming out of the China market. Currently, we have a positive book-to-bill of 107. Q4 revenue in the Americas region finished down slightly over the prior quarter of $66 million versus $70.1 million, driven mostly by lower sales to our distribution channel. However, POS remains healthy and finished up 2%. Our automotive, medical, commercial, aerospace, and military segments all experienced stronger demand during the quarter. During the quarter, we also saw improving demand coming from our EMS partners in Mexico. Currently, our book-to-bill ratio was positive at 1.16. Turning now to our joint venture investment with NEC. The financial results of NEC TOKIN as Bill pointed out is ahead of plans. Sales came in at $122.4 million and this quarter they delivered a small J-GAAP net income for the first time in quite some time. We’re pleased with the strategy that we have developed together that will ultimately bring NEC TOKIN together with KEMET at 100% ownership level. The team there is doing a great job in implementing this strategy and our relationship is very strong, and we are looking forward for continued progress toward our goals. Now, turning to our forecast for the second quarter of fiscal 2015, which began July 1 as I noted earlier, the macro picture in the U.S. and Europe remain somewhat encouraging, but continues to march along at about the same pace for now. We expect some European vacation impact, as it would be the norm for this next quarter, and of course we cannot predict the impact of the various conflicts, that seem to flare up around the world periodically. So once again, we believe that we’ll see another quarter like this one, regarding revenue with the range of $206 million and $212 million with continued improvement of our bottom line. I expect the margins will improve in the range of 100 basis points to 200 basis points. And we remain focused on achieving the profitable financial results of these revenue levels, and expect to build upon our successes, one quarter time throughout this fiscal year to reach our goal. And on another note, we did file our Conflict Minerals Report to the SEC on June 2nd. We did declare our Tantalum Surface Mount MnO2 in Polymer conflict free. KEMET was one of the four companies, only four companies to file a special directive with a special audit done. And I think we were the only capacitor manufacturer to do so. And as always, thanks to our hard working employers that continue to make the extra effort to improve our performance and enhance our customers experience. And this concludes our prepared remarks. And we’ll be happy to respond to any of your questions.

[Operator:]

Thank you. (Operator Instructions) Your first question comes from the line of Matt Sheerin with Stifel.

[Per-Olof Loof:]

Hello Matt.

[Per-Olof Loof:]

Good morning Matt.

[Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.:]

Hi Per and Bill. Just a couple questions on what you saw on the distribution channels, as like it was sort of a mini inventory correction. Has that played out and do you have a sense of weeks of inventory like now versus a quarter ago?

[Per-Olof Loof:]

If you look at the numbers, the POS numbers quarter-over-quarter, that was down $4 million for us in the distribution channels. So basically more than what the revenue declined OM and EMS was up slightly, and we think that direct. And the POS continues to be healthy. But I think the inventory correction has probably played out slow right now.

[Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.:]

Okay. Could you give us an idea of your product lead times and today broadly speaking versus a quarter ago?

[Per-Olof Loof:]

There are about the same as they were about a quarter ago. We’ve seen some lead time extensions and a few other product lines, but basically around the same as they were a quarter ago.

[Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.:]

And could you give us some color Per on the end markets, particularly telecom infrastructure and where there’s been some signs perhaps of a little slowdown and then also mobility I know you’ve obviously have some broad exposure there in PCs as well.

[Per-Olof Loof:]

Well, we are seeing in our telecom was very steady for us in the quarter, down slightly. Computers were right on right on where we were in the quarter before, industrial down slightly again, automotive and defense, automotive was up actually and defense was very steady. So I think the markets are very steady. I think automotive continue to show strength. We are also seeing strength in the military and aerospace market and that continue strengthen in medical end. And there are some signs that the computer segment at least for us this is starting to pick up some. Telecom for us, it was very steady and we were kind of thinking that’s going to be the case. However, you could argue that with what’s been talked about this going to be an increase in telecom, a CapEx spend over the next several quarters due to the programs that are in place particularly in Asia.

[Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.:]

Okay, that’s helpful. And on the margin guidance are up despite flat to down revenue, what’s driving that? Is that mostly all gross margin and where is that coming from, is that the tantalum?

[Per-Olof Loof:]

It is all gross margin, it is across the board. It has to do with the cost actions we’ve taken in the film and electrolytic group. The plant consolidations, the line moves to more cost effective regions of the world. That’s going to play out over several quarters and continue to play this entire fiscal year, so we’re going to see improvement quarter over quarter this fiscal year. And it’s driven by plant consolidation activities in our tantalum business, as well as the vertical integration effort. So it’s all cost actions taken in the various businesses is relating to moves of activity from higher cost area to a lower cost area, and efficiencies and yield et cetera, as well as the investment integration, which continues to play out quarter over quarter. We also did move in our tantalum space, we did move our activities from Evora, Portugal to Mexico as which happen actually on July 1, this quarter. So all of these things are playing out. We know these are all the margin increases that we’re going to see are all coming from these actions. And they will continue to play out every quarter, so we expect Q3 is related to Q2 and Q4 related to Q3.

[Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.:]

In new revenue, Per, has been running sort of flattish for a few quarters now and you’ve see nice gross margin expansion, if you continue to run in this way I say 210 to 220 range, in the next three quarters where can margins go in the sort of flattish environment.

[Per-Olof Loof:]

Well. I guided to 100 and 200 up for next quarter. Now we’re going to see similar increases would be my expectation in the quarters after that as well.

[Per-Olof Loof:]

In flattish.

[Per-Olof Loof:]

Flattish revenue.

[Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.:]

Okay, great. And just last for me, if I may, just regarding NEC TOKIN. Any update in terms of your thoughts about the transaction? I know some windows are opening and could you update us there? And then also on the debt side, Bill, what would have to be done in terms of restructuring the debt if such merger with NEC TOKIN were to happen?

[William M. Lowe Jr.:]

There are windows that are opening. It is hard to discuss that more than what I said in the prepared remarks, but we are very pleased with the progress we’re seeing with NEC TOKIN. And we believe that the teams will be able to come together well when we are going to do that and the strategy stays. Timing is a little difficult to discuss at this point, but the strategy we’ve laid stays and we look forward to when we can actually integrate the two companies.

[Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.:]

But do you have the financial wherewithal amounted to do something like that now?

[Per-Olof Loof:]

Well, I think, Mat, we’ve always said that we’ll have to do something with our current debt structure and our current bond issue. And I think it’s a as Per said, when we are prepared to make remarks about how the timing of the actual completion of the acquisition, we will discuss that as well at the same time.

[Per-Olof Loof:]

But clearly, Mat, as you would expect, we do have ideas of how that would happen.

[Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.:]

Sure. Fair enough. Okay, thanks a lot guys. I appreciate it.

[Per-Olof Loof:]

Thanks, Matt.

[Operator:]

Your next question from the line of Hamed Khorsan with BWS Financial.

[Hamed Khorsand – BWS Financial, Inc.:]

Hi, good morning, guys.

[Per-Olof Loof:]

Good morning.

[William M. Lowe Jr.:]

Good morning.

[Hamed Khorsand – BWS Financial, Inc.:]

Just easy question I have for you is, have you picked up any market share at all this past quarter with new product designs?

[Per-Olof Loof:]

Yes, is the answer to that.

[William M. Lowe Jr.:]

We’ve picked up market share, and you know, we’re a small player. We are a specialty player in ceramics, but even looking at that, we’ve picked up percentage point of market share in our ceramic business and we’ve picked up market share in tantalum slightly and we’ve picked up a little bit of market share in film as well. So we have picked up some market share.

[Hamed Khorsand – BWS Financial, Inc.:]

Okay. And what I was trying to lead to at that is you’re seeing pick up the market share, but we’re seeing flattish revenue growth and then you’re seeing inventory corrections, can you just fill in the blanks there because I just don’t get it right now? How you can get increased market share with inventory correction hurting the revenue line and the revenue actually just not growing for the past nine quarters.

[Per-Olof Loof:]

I don’t have the annual numbers ending this quarter, but if you look at last quarter, we didn’t talk about that I believe. The overall market declined upwards six percentage points globally. Our revenues in the cap space increased 2% year-over-year. So that’s really how this market share improvements is happening. So we’ve seen continuing decline in the cap space. We think that’s going to turn, and we’ve been able to tweak out a small increase in our share even though the market globally has been coming down slightly.

[Hamed Khorsand – BWS Financial, Inc.:]

Okay.

[Per-Olof Loof:]

That’s how our math works.

[Hamed Khorsand – BWS Financial, Inc.:]

All right. And how prepared are you if the auto industry starts to slow down. Is there another vertically enter into that you can offset some of that slowdown.

[Per-Olof Loof:]

Well, automotive is very important to us, but 20% of our businesses in automotive. We see programs extending out and it’s not just in the U.S., it’s globally. So we’re well positioned as this industry continues to show strength, but is not only. There are strengthen in other specialty areas medical, aerospace, and military where we can actually also improve our performance thus these markets tend to show some strength.

[Hamed Khorsand – BWS Financial, Inc.:]

Okay. And my last question is – how much more margin can you squeeze out of operations at the current revenue line – levels.

[Per-Olof Loof:]

Well I said we do 100 to 200 this next quarter. I would expect that our performance quarter after that will be in the similar range. And we’ll get up. So you can, you can start adding the math. I don’t really want to give you a number that extends four, five quarters out, but clearly there is still some significant runway we have on these cost actions that have been taken and our start to make its way towards the bottom line. As you can expect when you make these moves, it takes a while for it to trickle down, but we can see that happening. We saw some happening in this quarter, we’re going to see more this quarter, the quarter we’re in and further improvements in Q3 and Q4. But we still have some runway to go.

[Hamed Khorsand – BWS Financial, Inc.:]

Thank you.

[Operator:]

(Operator Instructions) Your next question comes from the line of Marco Rodriguez with Stonegate Securities.

[Marco A. Rodriguez – Stonegate Securities, Inc.:]

Good morning guys, thanks for taking my questions. I wanted to kind of follow up on Solid Capacitors Business, I believe you mentioned some weakness on the ceramic side. I mean, obviously the Solid Capacitor Business was down sequentially, where normally it’s kind of up. Were there any other drivers in the quarter? Does that create weakness or is it pretty much just the ceramics like you discussed?

[Per-Olof Loof:]

What will happens, I mean the tantalum product line was right on the nose from the quarter before. Ceramic had a strong quarter, but it was down. The $3 million difference that we have in the quarter was all in some in ceramics. So and that has deal with some of the programs that we are supporting. Some of them are not strong in this quarter and they will continue to come back in next quarters. I think we’ll see some strength in ceramics this quarter coming back, so I don’t. Ceramics had a good quarter, again when we thought, but down a little bit from a very, very strong Q4.

[Marco A. Rodriguez – Stonegate Securities, Inc.:]

Okay. And then in terms of the gross margin improvement, the 100 basis point to 200 basis point improvement sequentially. Can you kind of help us think through, I mean how much of that is the F&E restructuring, excuse me. And how much is from the vertical integration?

[Per-Olof Loof:]

I’d say 30% of that is probably out of the F&E business. It’s a much smaller business, of course, and the rest is out of, not just vertical integration, but also some of cost actions were taken in the tantalum business as well. So, it’s basically across the board, but a lot of it is in our Solid Capacitor Group actually.

[Marco A. Rodriguez – Stonegate Securities, Inc.:]

Got it. And the European integration, when is that going to be completed?

[Per-Olof Loof:]

Which integration?

[William M. Lowe Jr.:]

IT.

[Per-Olof Loof:]

Oh, IT. IT, we’re in the process, as you know doing Oracle across. We have two more plants to do. We have a plant in Sweden, that’s gone online in October, and then we have the Italian facility and due to a number of moves that we are making still around Europe, and also the fact that we did sell our machinery unit and they’re running off the old ERP system in Italy. We’re going to make the final, the last plant, which is only one last really. We’ll make that change about a year from now. Maybe a little sooner, but certainly after we end this fiscal year. It’s just – it’s not practical to do it at this point with so many moving parts.

[Marco A. Rodriguez – Stonegate Securities, Inc.:]

I see. Okay. And, I’m sorry.

[Per-Olof Loof:]

And then we’re done.

[Marco A. Rodriguez – Stonegate Securities, Inc.:]

Got it.

[Per-Olof Loof:]

And all the plants are all Fuel Systems and we’re all on.

[Marco A. Rodriguez – Stonegate Securities, Inc.:]

Perfect. And just a follow-up on your previous question on NEC TOKIN. I know in the past, you’ve mentioned the possibility of kind of skipping step two and going just straight to options is that still kind of the front of your thinking?

[Per-Olof Loof:]

Yes, that’s still the front of our thinking, yes.

[Marco A. Rodriguez – Stonegate Securities, Inc.:]

Okay, got it. Thanks a lot guys.

[Per-Olof Loof:]

All right. Thank you.

[Operator:]

Your next question comes from the line of Ana Goshko with Bank of America Merrill Lynch.

[Ana Goshko – Bank of America Merrill Lynch:]

Hi, thanks very much. So, I just wanted to clarify, so on the guided margin improvement, I think you’ve implied couple of times on the call so far that the 100 to 200 bp sequential improvement, is that the gross margin line. So, I wanted to understand what you’re thinking about adjusted SG&A cost, should we think about those as flat or is there any room for improvement there?

[William M. Lowe Jr.:]

They will be flat this quarter. There are improvements that will happen in that cost category in Q3 and Q4, but this quarter you should think of them as pretty flat.

[Ana Goshko – Bank of America Merrill Lynch:]

Okay. And then when I look at reconciliation, I think, given the back of the Slide deck for the F&E gross margin segment. One of things I noticed is even though there is a 2.5% adjusted gross margin, if we take into account the plant start-up costs and plant shutdown costs, on a cash basis, it is still negative gross margin. So, I wanted to understand when you believe you’ll be able to get that to positive and when those plant start-up costs and shutdown costs will be kind of gone?

[William M. Lowe Jr.:]

It should be, we said that as we moved into Kentucky, we had some rollover into this quarter and you’re seeing that in these expenses. The shutdown costs, of course, were related to Sasso Marconi and that’s shutdown, closed and done. So you won’t see the shutdown cost continuing. And plant start-up costs, if there is any, that’s going to be pretty minor. I think we should be rolling out of it with this point.

[Per-Olof Loof:]

I mean we are, we are done with that plant, with consolidation. And there are some minor moves that are going to happen over the year from other locations. But in terms of the tie-in activities, that’s done.

[William M. Lowe Jr.:]

Yeah.

[Ana Goshko – Bank of America Merrill Lynch:]

Okay, so then, theoretically, next quarter, the GAAP gross margin and the non-GAAP should be closer together because there will be a lot less add-back.

[Per-Olof Loof:]

That would be much expectation.

[William M. Lowe Jr.:]

Yes, right, you’re correct.

[Ana Goshko – Bank of America Merrill Lynch:]

Okay, good. And then, it looks like you drew on revolver. Was that about a $5 million increase in the quarter?

[William M. Lowe Jr.:]

It was – million and we paid it back off right after the end of the quarter. So, the balance today is the same balance as we ended last quarter.

[Ana Goshko – Bank of America Merrill Lynch:]

Okay. And then in terms of the current quarter, you do you have that final near-term payment in August, right? And just wondering, if you feel, you can make that from free cash flow if you will need to draw for that.

[Per-Olof Loof:]

Yes, it’s in the plan to make that out of our cash flow. Yes.

[William M. Lowe Jr.:]

And then we have, there is one more after that in December relating to royalties, which we believe is in the $8 million

[Per-Olof Loof:]

$8.5 million.

[William M. Lowe Jr.:]

$8.5 million average, yes.

[Per-Olof Loof:]

And then that is tough.

[William M. Lowe Jr.:]

To answer your question, yes, we expect to pay out the cash flow in August.

[Ana Goshko – Bank of America Merrill Lynch:]

Okay. So that should be a positive to cash flow in order to cover that payment. Okay, great. Okay, thank you very much.

[Per-Olof Loof:]

Okay, thanks, Ana.

[Operator:]

The next question comes from the line of Wamsi Mohan with Bank of America Merrill Lynch.

[Per-Olof Loof:]

Good morning, Wamsi.

[William M. Lowe Jr.:]

Good morning, Wamsi.

[Wamsi Mohan – Bank of America Merrill Lynch:]

Hi, good morning. Good morning, Per. Good morning, Bill. Can you talk a little bit about the pricing trends in tantalum and ceramic if there’ve been any new developments there?

[William M. Lowe Jr.:]

We are seeing there are some pricing pressures in some segments in our tantalum business, but it’s steadying from what we saw a couple of quarters ago. In ceramics, we have we’ve seen pretty steady pricing trends in our ceramic business actually.

[Wamsi Mohan – Bank of America Merrill Lynch:]

Okay, thanks.

[William M. Lowe Jr.:]

So we don’t think pricing is the major issue at this point.

[Wamsi Mohan – Bank of America Merrill Lynch:]

Okay, thanks. And are you – what are you seeing in terms of raw material pricing, particularly for tantalum and how much of your needs that you’re now satisfying internally, I’m sorry if I missed that if you already talked?

[William M. Lowe Jr.:]

No, no, I didn’t actually talk to that, so you didn’t miss that. This quarter we did, out of our tantalum needs, from our own sources was 70%. So 70% we did and 30% we acquired and we’re seeing steady even on what we’re buying, what we’re seeing reasonable pricing on the tantalum side as well. So we’re not seeing any material increases. And what I said the vertical integration efforts that we’re undertaking is going to continue to draw larger benefits as more and more of what we are doing actually makes its way to the bottom line. So we’re very happy with them with the progress and I think I was actually in mining in the Congo a couple of weeks ago and together with the sustainability activities we don’t need the (indiscernible) is really remarkable to see what has been happening there over the last couple of years, quite remarkable.

[Wamsi Mohan – Bank of America Merrill Lynch:]

That’s great. How many more quarters of restructuring do you expect?

[William M. Lowe Jr.:]

I think we have a plan now, there are a couple of three more actions that are underway that I can’t really discuss it on the call here. But the three more activities that are going to happen over the next couple of quarters and then we’re basically done.

[Wamsi Mohan – Bank of America Merrill Lynch:]

Okay. And this relates to, could you tell us which business segment it relates to?

[Per-Olof Loof:]

It relates to F&E and it relates to tantalum. So this has to deal with plant moves and things that have been in the works for some time and we’ll finish them out. The last one will probably not happen until April of next year several of them will happen over the next couple of quarters.

[Wamsi Mohan – Bank of America Merrill Lynch:]

Is there a way you can size you’ve done this in the past, but it’s been a while so just wanted to get an update, maybe if you could. How much dollar benefit do you expect maybe over the next year from all the cost actions that you’ve taken so far in all the vertical integration if you were to lock everything together?

[William M. Lowe Jr.:]

Going back all the way from we started?

[Wamsi Mohan – Bank of America Merrill Lynch:]

I mean I am more interested in like what you’d expect from a benefit perspective over the next year based on everything that has happened so far from where we are today.

[Per-Olof Loof:]

I said that the improvement this quarter is 100 to 200 basis point and that’s all coming from this activity, right. And what I also said, you can expect to see more improvements coming as these things makes its way to the bottom line. So you can expect similarish improvements quarter after that and so forth. So we have at least four quarters now of improvements that we’re going to see with the actions that are currently underway. That will basically, for the most part all hitting the gross margin. There are some of these actions that will hit the SG&A line, but for the most part is going to hit the margins. Now you may have...

[William M. Lowe Jr.:]

I’d only add that you know to reiterate what Per said is that many of the actions that are affecting the margins that Pe has talked about have already taken place. As a matter of it working it through the accounting systems, you know take that in the solid capacitor group with the vertical integration. The impact of what we’re doing both internally going from 70% to our goal of 80% continues to ratch it down our cost, but it has to run through inventory, has to go through the cycle. So it has to be made, has to go through the cycle, go in inventory and then be sold. So that’s why basically when Per described it happening each quarter is because of just the way that continues to work as we ramp up the internal consumption, as well as how we buy and what we pay for our ore across the globe. So it does take time to work through the accounting numbers, through the inventory, and get through the cycle and that’s why it doesn’t happen in a big bang theory all in one quarter.

[Per-Olof Loof:]

And to put some more color on that, the benefits we’re going to see this quarter, the actions actually happened a quarter ago.

[Wamsi Mohan – Bank of America Merrill Lynch:]

Right.

[William M. Lowe Jr.:]

And we just got in from a point, we’ve just really gotten into Pontaccio.

[Per-Olof Loof:]

Yeah, right.

[William M. Lowe Jr.:]

So this is the first quarter we’re actually in Pontaccio and out of Sasso Marconi. So you’d have to give it a little bit of time now for all those changes to work through the structure and that’s why again when Per refers improvements occurring in each group quarter-over-quarter, it’s that many of the actions have already taken place. And as Per described, we have two or three left to go that will occur over the next several quarters that are new and will be incremental to what we’ve already done.

[Wamsi Mohan – Bank of America Merrill Lynch:]

Okay, great, thanks for the color guys.

[Per-Olof Loof:]

Thanks.

[Operator:]

Your next question comes from the line of Owen Douglas with Baird.

[Owen Douglas – Robert W. Baird & Co.:]

Hi guys, thanks for taking questions here. Got a quick one on CapEx. I was just curious about what you think of for this year’s CapEx spend? I know you mentioned next quarter you’re thinking at $5 million to $8 million range, but I was just trying to get a sense, because I don’t think we’ve really, it’s been a while since we’ve really seen it down at that run rate of $20 million a year level. So any color if you give on that will be appreciated.

[William M. Lowe Jr.:]

Well, it’s again the range is 20 to 25, unless if you’re right. And we have spent more than that in the last couple of years, but we’ve been focused on restructuring and have built some buildings in the last couple of years. We’ve built Macedonia. We also built Pontaccio. So our largest portion of capital expenditures when we spent the $40 million plus in the last couple fiscal periods has been structural. And as Per has said in some calls, we’re done building buildings. We’re not building any more buildings. And some the complete disclosure, many of the dollars associated in this first quarter with capital is still related to Pontaccio. So, there is some expenditures of carryover that role in this year even in the 20 to 25. And my last comment really just to say that we typically get asked what is maintenance capital here and it’s very low. You know maintenance capital number here is between about $5 million to $7 million from everything from structural components of buildings to equipment. So, a spend of 20 to 25 a year still allows us to do what we need to do from a technology standpoint, expand production, et cetera.

[William M. Lowe Jr.:]

But, I mean, there are two major investments we’re making this quarter that are for products that we’re going to build. One in ceramics and solvent [ph] capability in Mexico, and the other is for axial electrolytic caps both in the Americas and in Europe. So those are the two big CapEx projects that we are focused on this fiscal.

[Owen Douglas – Robert W. Baird & Co.:]

Okay, thanks for that. And also what about thinking about working capital, last year you guys were able to work off quite a bit of inventory, what should we be thinking about for the following three quarters in 2015.

[Per-Olof Loof:]

The objective is to get to five turns and we’re moving towards that target, we’re not quite there yet, but we expect over the next several quarters that we’re going to get to that position actually. As many of these moving activity is over, the various buffer stocks actually do get eliminated in that process. And so you can expect further improvements in our capitals inventory.

[William M. Lowe Jr.:]

I think quarters three and four will probably show the most improvement. Quarter two could be relatively flat to Q1.

[Owen Douglas – Robert W. Baird & Co.:]

Okay. So I think doing some rough math that sort of indicates another $30 million of inventory that could be released from the system?

[Per-Olof Loof:]

That’s what that math would say, yes, you’re right.

[William M. Lowe Jr.:]

Whether that occurs in this fiscal year.

[Per-Olof Loof:]

It may not happen this quarter, but ...

[William M. Lowe Jr.:]

You may not get all the way to that five turn number at the end of this fiscal year, but that’s the goal we’ve established internally. I think you will see a substantial improvement between now and in the fiscal year just like we did last year.

[Owen Douglas – Robert W. Baird & Co.:]

Okay, that’s good. And finally, just sort of thinking about, I know you’ve answered a lot of question regards to restructuring activity in the Film and Electrolytics. As we think about that margin improvement, you’re referring to margin relative to the adjusted gross margin numbers. And I’m just trying to get a sense to make sure that as some of that ramp-up occurs there that we’re not trying to double-count anything since there are certain number of add backs including adjusted gross margin number?

[Per-Olof Loof:]

No.

[William M. Lowe Jr.:]

No, I don’t think so. Not the way we’ve looked at it.

[Owen Douglas – Robert W. Baird & Co.:]

Okay. So do you think that you can actually get this business to a free cash flow positive? Backes, remember you saying that if it didn’t perform according to plan that you guys would have to think about you know whether or not to proceed in that business, and I find it hard to believe that part of your plan was to have it be a negative cash flow contributor?

[Wilfried Backes:]

Of course not, of course not. As we talked about it takes a while to have these actions actually make its way to the bottom line. We’re going to see some further improvements this quarter. We’re going to see even more improvements in the next quarter. And of course, it has to be a cash flow contributor to the business clearly.

[Owen Douglas – Robert W. Baird & Co.:]

Okay. Thank you very much, guys. Appreciate.

[Per-Olof Loof:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Kevin Kuzio with First Eagle Investment Management.

[Kevin Kuzio – First Eagle Investment Management:]

Good morning, guys.

[William M. Lowe Jr.:]

Good morning.

[Per-Olof Loof:]

Good morning.

[Kevin Kuzio – First Eagle Investment Management:]

I have just a couple, I think simple questions. One is maybe I’m being not quite putting the pieces together, but a few questions back there was a reference to the NEC steps that remain to be taken and mentioned maybe skipping over step two and moving right to option three, does that mean to a full purchase or could you explain what has been skept and what the plan if?

[William M. Lowe Jr.:]

Yes, what we have the opportunity to do is to take step 2, which would that we would ownership to 49% from 34%. But we also have the opportunity to go from 34% to 100% in one go. And what we’re saying when we’re thinking about skipping step 2, that’s really what we’re referring to.

[Per-Olof Loof:]

A number of presentations ago, again I forget which bank conference it was, we’ve been a pretty much public record for a while now saying that we would skip that first call and actually combined both calls at the same time ago from 34% to 100% as our preference.

[Kevin Kuzio – First Eagle Investment Management:]

Okay. Is there a date on that option that’s coming up, or do you have a lot of runway on it?

[Per-Olof Loof:]

Yeah, there is date to when we need to make some decisions here. And of course, we are in close cooperation with NEC, our joint venture partner, as to how we will do this. And of course, they are very much interested in ensuring that this strategy rolls out. So, these conversations are ongoing and I can’t really say much more about that at this point.

[Kevin Kuzio – First Eagle Investment Management:]

Okay, thanks. And just one other question. I think the high yield bonds appeared to be currently callable and I wondered if you had any comments or insights that you could share with us and what you might be thinking there, if anything?

[Per-Olof Loof:]

Well, I mean, yes, they are callable. That’s correct. And, so that’s also a part of the conversation at the company at this point of course.

[Kevin Kuzio – First Eagle Investment Management:]

Okay. All right. Thanks.

[Operator:]

Your question is a follow-up from Matt Sheerin with Stifel.

[Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.:]

Yeah, thanks. Just a quick follow-up regarding thoughts on the tax rate for this quarter, Bill?

[William M. Lowe Jr.:]

Yes, I think it will – probably this quarter being the next quarter or are you referring to include Q2?

[Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.:]

Yes.

[William M. Lowe Jr.:]

I think it will look relatively similar to what Q1 looks like. I mean, again, I pointed out that because fourth quarter of last fiscal year with the number of countries that have changed laws, et cetera, et cetera, when we worked through our calculation, we ended up actually with a credit; that’s unusual. And I would expect we typically see a number here anywhere between $1.2 million and $1.8 million as a tax charge to our financial statement, and I’d expect it to be in that normal range.

[Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.:]

Okay, that’s helpful. And just regarding that, the date regarding NEC TOKIN, is that’s coming up next month, right?

[William M. Lowe Jr.:]

That’s correct.

[Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.:]

Yeah, okay. All right. Thanks a lot.

[Per-Olof Loof:]

Thank you.

[Operator:]

And there are no questions at this time.

[Per-Olof Loof:]

Well, thank you very much for being on the call this morning, and we appreciate the discussion. And we look forward to talking to you again in another quarter. Thank you very much.

[William M. Lowe Jr.:]

Thank you.

[Operator:]

This concludes today’s conference call. You may now disconnect.