KraneShares Dynamic Emerging Markets Strategy ETF
Q4 2013 Earnings Call Transcript

Published: 9 May 2013

[Executives:]

Dean Dimke – Senior Director, Marketing Communications and IR Per Lööf – CEO Bill Lowe – EVP and CFO

[Analysts:]

Sherri Scribner – KEMET Matt Sheerin – Stifel Wamsi Mohan – Bank of America Merrill Lynch Ana Goshko – Bank of America Merrill Lynch Amitabh Passi – UBS Hamed Khorsand – BWS Financial Marco Rodriguez – Stonegate Securities Scott Russian – Liberty Mutual Group Owen Douglas – Robert W Baird Pauline Spakes – Metal Pages

[Operator:]

Hello and welcome to today’s KEMET reports Fourth Quarter Fiscal Year 2013 and Annual Earnings Results Conference Call. My name is Lisa and I will be your event specialist. At this time, 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). I would now like to turn today’s call over to your host Mr. Dean Dimke, Senior Director, Marketing Communications and Investor Relations. Please go ahead sir.

[Dean Dimke:]

Thank you, Lisa. Good morning and welcome to KEMET’s conference call to discuss our financial results for our fourth quarter of fiscal year 2013. On the call with me today is Per Lööf, our Chief Executive Officer; and Bill Lowe, our Executive Vice President and Chief Financial Officer. As a reminder to you, our presentation is available on our website that should help you follow along with the financial portion of our presentation this morning. 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 expect, anticipate, plan, intend, project, and indicate. Although they reflect our current expectations, these statements are not guarantees of future performance, but involve a number of risks, uncertainties, and assumptions. Please refer to our 10-Ks, 10-Qs and the recent registration statements filings for additional information on risks and uncertainties. Now, I’ll turn the call over to Per.

[Per Lööf:]

Thank you, Dean, and good morning everyone. Our revenue increased quarter-over-quarter even during the Lunar New Year quarter which as you know takes an entire week of production out in Asia. However, while our revenue was up, our margins were disappointing, even though, that was slightly up over Q4 a year ago. As a result, we are taking additional significant steps to reverse this trend. As we announced this morning that we are making several changes in our senior management team. Marc Kotelon will step down as the Head of Global Sales and will be replaced by John Drabik, previously our VP of Sales in the America. Marc will help us through a short transition. I want to thank Marc for his many years of dedicated service to the company and wish him luck in his future endeavors. As you may know, we did already appoint a new head for our European business, Andreas Meier, and he is already making a very positive impact. We will announce John’s replacement for our US business shortly. Additionally, we will be making some further changes in our sales group also in Asia. It is imperative that we refocus our efforts in the Asia region. Across the globe, we are making sure that we are focused and committed to delivering to our customers’ expectations and on time. Firstly ensuring that we are able to compete where we are qualified on the approved vendor list and secondly at the size we need to have our capabilities qualified and added to our customers billing materials with existing customers as well as new. I expect that our new sales leadership along with our cost reduction efforts will expedited keeping us competitive for the long haul. We also announced this morning that we will combine our Tantalum and Ceramic business areas under one executive. Chuck Meeks will take over as a head of both business. Chuck was instrumental in the ceramic unit’s turnaround a few years ago as its key architect. We are expecting Chuck to take full advantage of our vertical integration investment as well as our investment in NEC TOKIN. Simply put is to make sure that each of his groups meets our margin expectation, by returning our tantalum business to our timeless model performance, even during difficult market conditions. Conrado Hinojosa, previously the Executive in-charge of our Tantalum Group, will assist during a brief transition before leaving the company in June. We want to thank Conrado for his many years of fine service to our company and we wish him well in the future. I’m delighted to announce that Bob Willoughby will be the new Head of our Film and Electrolytic Business Group. Bob has a long career with KEMET and will continue the work that we started to ensure that F&E will again be a strong contributing part of KEMET. There are important future technologies for us in this business unit, in particular in combination with NEC TOKIN technology. As for instance, combining NEC TOKIN’s inductor capability with our company’s capacitors, this combined technology offering gives us a very competitive stance and the strong case to support hybrid vehicle development in all areas, Japan included. The F&E restructuring is on track and we’re convinced that this program will allow us to make money at lower revenue levels, while current revenues, our financial results have been disappointing. I and my team believe that we should continue our restructuring efforts and see it to completion later this fall. However, we are closely monitoring the financial results against expectations. If expectations are not met, we will be evaluating over the next several quarters whether or not this business or parts of it should remain in the KEMET family for the long term. All parts of KEMET must contribute and create value for our shareholders, and while we can see how the F&E technologies present and future will create value, our customers must also recognize this for revenue growth as a result. We will, as always, keep you up-to-date with our progress. Lastly, before I turn the call over to Bill to discuss the financial results, let me comment on our progress to reduce our operating cost. We told you that if we didn’t see a continued improvement in volume and revenue, we would continue to reduce our operating cost to reach a breakeven net income at around $200 million of revenue. Clearly, we’re not there yet. So this morning we announced a further reduction in force that would help us get there. Bill will go through the numbers but this effect an additional 202 salaried employees in 10 countries with 71 from within the United States. This reduction will not affect our ability to take advantage of an upturn in volume and activity. We’re able to take this action now due to our investment in NEC TOKIN. This is an early synergy benefit that we’re able to take advantage of now due to the agreements reach on how to move forward with our tantalum business. As you may have noticed, we did announce that we have reached an agreement to cross sell each other’s products as well as cross license our valve metal technologies. While these decisions that affect so many are difficult, we realize that is imperative that we’ll reach our goal to create value and build cash during the fiscal year. Reaching a new cost base will create tremendous leverage when volume returns to our industry and KEMET as it work. We are very well positioned to take advantage of the upturn. Now I will turn it over to Bill to discuss the financial results for the quarter. Bill?

[Bill Lowe:]

Thanks, Per. And good morning everyone. I’ll begin my review actually on two slides, the information will be on slides three and six, if you have (inaudible) phone-in line and the slide deck is on the website. Net sales of $203 million for the quarter were up slightly over the prior quarter of December 2012 of $200 million, which is slightly above our quarter-to-quarter forecast. Our non-GAAP gross margin as a percentage of sales was 14.2% compared to 18% in the prior quarter. Our drop in the gross margin was driven by lower margins in tantalum and film and electrolytics which both were impacted by lower volumes and in tantalum’s case, also an impact of mix selling MnO2 versus polymer. The GAAP loss reflected for the quarter was $0.53 per basic and diluted share, and our non-GAAP loss, which is reconciled on slide nine, was $0.22 per basic and diluted share. Adjusted EBITDA for the quarter was $11.4 million, down from $18 million in the prior quarter ended December 31. Turning now to slide seven, our adjusted non-GAAP SG&A expenses were $23.4 million and we’re in line with our forecasted SG&A for the quarter. On slide 13, total capital expenditures during the quarter were $7.2 million, of which $2.6 million related to our OEM contracts. Total CapEx for the fiscal year excluding the OEM contract expenditures were $36.3 million. We expect our capital expenditures for the first fiscal quarter of our fiscal year 2014 ending in June to be in the range of $7 million and for the entire fiscal year in the range of $30 million to $40 million. Cash in the bank at March 31 was $113.4 million and cash generated from operations during the quarter was $18.8 million. As we forecasted, improvement in working capital primarily inventory reductions contributed to this improvement. As Per mentioned, this morning we announced additional cost rationalization efforts, continuing our march towards profitability at the current run rate of revenue. This reduction in force will effect 202 employees. We accrued approximately $1.8 million of severance in the March 31 quarter that were reported today and we will accrue additional amount approximately $2.6 million in our quarter ended June 30. Savings are expected to be approximately $3.8 million for quarter beginning immediately, but with full effect in the September 30 quarter. Fiscal 2014 savings are expected to be approximately $12.3 million. We are clearly focused on a lower breakeven point, but positioned to the upturn in the cycle when it occurs. Regarding our forecast for next quarter, we expect once again to see a revenue picture that is more or less flat to this March quarter. Now I will turn the call back over to Per to discuss our view of the markets, our business units and some comments about our NEC TOKIN joint venture. Per?

[Per Lööf:]

Thank you, Bill. Let’s spend a minute or two addressing the overall market before reviewing our business. As many have reported, we see some positive signs that the world economy is recovering. But it looks more like two steps forward and one step back. The U.S. reported 2.5% annualized growth in the first calendar quarter up from an anemic 0.4% in Q4 of 2012. But the recovery is not universal. We all saw this so called slowing growth in China to 7.7% for the first quarter this year. We do welcome a new government in Italy, and Greece is still in the Euro with the same government as in July last year. The Italian political scenery is almost comical. It’s an 88-year old grandfather, who is someone’s dad to appoint a new government of grandchildren, young men, women across the political spectrum. I think that this will be good for growth, however. The European austerity program may be placed on the backburner for a while and this is good for growth. And we do see our European business ticking up. In the Americas, even though the GDP numbers were positive, the slowing government spending to sequestration will not help businesses in the short run. Our outlook here is stable, however. In Asia, it’s mix. We all know why the laptops have stopped growing and a new line up of devices are gaining share, smartphones, tablets and hybrid. You see this most prevalent in Taiwan among the OEMs. No real growth and lackluster financial performance. This affects both KEMET and NT, more so in the short term than over a longer period. When demand drops, component manufacturers like us feel it immediately, and our drop is larger than the actual drop in demand. This is how the math actually works. The inventory in the chain has to be burnt off before new order intakes place. Apart from our Taiwanese, our laptop business in Asia is gaining momentum. We see good growth in telecom, alternative energy, industrial lining as well as automotive. The good news is that the server demand is increasing with growing connectivity demand. For us, the laptop, tablet, smart phone lineup needs to settle down before our demand picture in Taiwan returns to normal. This will take this quarter and maybe one more, but I believe that it will. The first quarter has started as expected but while we’re trying to make sure that we see quarter-over-quarter wealth as we start the year as Bill said, we believe, that flattish revenue is a more likely outcome once again. Our segment data can be found on slides four and five and the web slides point you to this data for reference rather than detailing it to you as I’ve done in the past. Now, regarding our regions, in EMEA, the revenues for Q4 increased 11% over the previous quarter. We have seen those increase because all channels, in particular within distribution channels followed by OEM business. The increase within our distribution network was supported by corresponding resell figures. The book-to-bill for the quarter was a positive 1.17, and it is still positive right now. In the Asia Pacific region, component sales were down 10% quarter-over-quarter, but book-to-bill is a positive 1.1% and has turned up a little down. Q4 revenue in the Americas region finished up slightly over Q3 as overall demand remained fairly flat. However, we continue to see increased demand from our automotive and commercial aerospace segment and we’re beginning to see a pickup in industrial. Our distribution business continues to holdup well as our POS increased 4.8% over Q3. Order rates in our current quarter are trending positively as our book-to-bill ratio is 107. In all revenue is tracking slightly higher than last quarter. In our business units, the Film & Electrolytic business revenue was up approximately 6.2% driven by improvement in our European business. Gross margins continued to be depressed as lower volumes negatively impacted fixed absorption. Our focus on cost reduction and specifically the restructuring effort continued to cost the business. The book-to-bill for the quarter was a positive 1.15 and still positive. In our Ceramic business, Q4 revenue was up 4.5% over the previous quarter. Gross margin results remain strong at 32.7% driven by operational cost improvement as well as regional and product mix effect. The Q4 book-to-bill ratio was 1.02 and is still higher. On the tantalum side revenue was down approximately 1% versus Q3, with gains in our specialty, automotive and industrial and telecom spectrum, and with adjustments in mix and volumes in the notebook, tablet and smartphone markets. The book-to-bill ratio for the quarter was 1.05 versus 0.83 for Q3 and is still high now at 1.13. On a total company basis, book-to-bill at March 31 was 1.05 and at April 30, 1.04. I’m pleased to report that we’re making great progress with NEC TOKIN investment. We did announced late yesterday the technology cross license agreement and a PLP agreement between our two companies. We will maintain two separate sales organizations but we will be able to share and integrate technology development and operations. In tantalum these efforts are well underway. In essence KEMET will focus on the ore to anodes development including wire and will be able to supply over time NT with anodes manufactured a result of our conflict-free Make Africa Work program. Operationally KEMET will focus is MnO2 manufacturing in the larger case size of the polymer and then NT on the smaller polymer case sizes as well as super capacitors. KEMET will also enjoy access to NT’s manufacturing processes and is managing to operate with significantly shorter cycle times and better yields. This will allow both of our companies to maximize efficiencies and streamline our respective cost structures that should provide customers of both companies with accelerated access to next generation of products. As noted, we also announced that we have finalized a POP or cross-selling arrangement between our two companies. This will open up opportunities for KEMET to sell of the NEC TOKIN’s products in areas where we have a better reach and for NT to market KEMET capabilities where we are lacking market coverage, specifically in Japan. We recognize that this will evolve over time, but I’m delighted to share with you that so much progress has happened in such a short time. We just closed on the transaction on February 1 of this year. We are going to be a very competitive organization as a result of these actions. This call also represents the final part of our fiscal 2013 period which ended March 31. I’d like to summarize some of our accomplishments this fiscal year. We did produce 20,500 pounds of tantalum powder in the last month of this quarter and maybe the contract with OEM was included, and we’re now in the process of establishing capacity to cope with expected increase in demand. NEC TOKIN’s transaction closed. F&E restructuring has continued at full speed, our Oracle implementation is now almost complete. Our market share has maintained as volume declined. The actions necessary to lower our breakeven point and be profitable at $200 million in revenue continues. Cash flow from the operations in the last quarter in excess of $18 million, and total cash at fiscal yearend at $113 million after the $50 million investment in NEC TOKIN. We have engaged customers, we see tremendous opportunities, we increased our market share this next fiscal year. Through our market reach, new exciting products that we will launch and by being cost competitive thus ensuring we can create value to our shareholders. I have great respect for our challengers, however, I’m absolutely convinced that we’ll be able to ride the tide in the downtown as well as in the upturn. We’re almost done with several years on necessary restructuring. The team that I put in place knows this business and is eager and hungry to prove their product and capture the opportunities ahead, as well as reducing our cost base allowing us to be competitive and profitable when the market is off. Let me end on slightly lighter, but still serious note. Bill, my trusted CFO and comrade in arms got married in the quarter. And I was proud and humble that he asked me to officiate the wedding. And this concludes our prepared comments and we’ll be happy to respond to any of your questions.

[Operator:]

(Operator Instructions). Your first question comes from the line of Sherri Scribner with KEMET.

[Sherri Scribner – KEMET:]

Hi, thank you. I just wanted to dig a little bit more into the margin performance this quarter. If you look at most of the segments, it seems like revenue was up and margins were down particularly in tantalum and F&E. Now I know you mentioned mix as an issue, but I just wanted to understand what would have driven the margins down so dramatically?

[Per Lööf:]

There were two things in the tantalum. So first off, volume was off a little bit as you noted in tantalum. Wasn’t off total company but it was off and that was basically because of the laptop business been in the Taiwan. As you – if you followed the company for some time, you will know that Q4 is typically a much lower production quarter for these types of products in Taiwan due to the Christmas build in Q3 – in our Q3, so that had an effect. So, we sold more MnO2 capabilities than polymer capability and that has a margin effect. So the product mix was significant. As I reported, we had a very successful March in our powder production, which is not gaining momentum. But we had a few issues in the first couple of months of the quarter, which damped our ability to actually produce. This had nothing to do with what we’re doing in our mines in Africa. It had to do with some of the activities between actually the ore and producing the powder. So, those two effects were the ones that impacted the margin for tantalum. In F&E, it’s also product mix issue and of course many of these activities that we are taking will first roll into inventory, which negatively affects our margins and then roll out as we implement them a quarter later, as we get the benefit a quarter later.

[Sherri Scribner – KEMET:]

Okay. Thank you for that and then just looking at the press release, this is sort of more of a technical question, but I didn’t see a detailed income statement and balance sheet. Are you not providing that going forward or is it just a new way of presenting the information? It’s typically helpful to have all the information in the press release, I don’t know if I missed it? Thanks.

[Per Lööf:]

No, Sherri, this is Bill. No, we will be going forward. The technical reason for that is, as you know, we don’t have the our share of the NEC TOKIN equity income or loss in our numbers yet and so actually to reconcile down to a complete bottom line income statement, would be a little bit misleading because we don’t have that number in there. So we’ve provided key metrics, key financial metrics in this particular press release, going forward I expect to be able to have that time – that amount timely or at least beyond one quarter lag or sometimes we actually have a number timely, and we will present a full income statement going forward as we have done in the past.

[Sherri Scribner – KEMET:]

Okay. Great. Thank you.

[Operator:]

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

[Matt Sheerin – Stifel:]

Yes. Thanks. Good morning.

[Per Lööf:]

Hello, Matt.

[Bill Lowe:]

Hi, Matt.

[Matt Sheerin – Stifel:]

So, a question on the – you’re talking about the $200 million revenue breakeven threshold, but I’m assuming that you don’t get there this quarter given it’s going to take some time to get some material savings with the vertical integration and then also in terms of these cost cutting actions that you’ve talked about. Is that correct, is there a timeline for gross margin and operating margin targets here over the next three or four quarters? And are you expecting gross margin to be up sequentially in the June quarter even though you’re guiding revenue to be flat?

[Per Lööf:]

Well, we typically don’t give the quarter estimates or quarter forecast on the margins as you know, Matt. But let me talk to your first point as to when do we expect this to happen. As you know, this is one piece of a three-legged stool, the other piece is the vertical integration, which we expect to contribute significantly over the next couple of quarters. And the third one is the F&E restructuring which will virtually be complete by the end of this fiscal. And when you add those three things together, we expect that those savings together will be $10 million a quarter. And if the current schedule holds, which we believe will, you’ll see those in the fourth quarter.

[Matt Sheerin – Stifel:]

Okay, by the fourth quarter. So the F&E sake, the F&E integration, that’s not going to be completed until the end of first quarter?

[Per Lööf:]

That’s going to take – and the reason it takes so long Matt, as you know is that we have to, we’re building new plants and we’re doing automotive – we’re doing production for automotive companies, which as you know takes a long time to qualify. So, our facility in Scopia, which is actually online is in the process of doing a lot of qualification work. So, we can actually turn over the activity till the quarter is complete. So, it’s going to take that amount of time. Our combination of the all the rest of the Italian activities closing another two facilities in Italy will take place over the summer. And then it will take the rest of this calendar year to qualify that facility fully. So, you’re really talking about that activity completing in this calendar year.

[Matt Sheerin – Stifel:]

Okay. And could you help us understand the issue that you’re facing with your own tantalum supply chain. It sounds like there’s issues on the, I guess the as the finished goods side, and are you now sourcing do tell us how much is that you are actually sourcing internally. I know you are going out to some of the bigger suppliers now and logging in contracts over the next two to three quarters to get you through that. And if that’s going to have a negative impact on margins?

[Per Lööf:]

What I’ve referenced in my discussion here on the first question, actually that came out this morning was the fact that when it comes to the actual mine in Kizingo and Katanga, and that is going well. And then we had a number of other chemical facilities, one which we own ourselves and one which we’ve been working with a supplier and that’s the one where we had some issues. So the quality of the reduced – or that the case of that well coming out of that facility was not at the quality levels we have. It got rectified in March and in March we were actually back to 20,000 pounds a month, which is about 60% of what we need. But we are in the process of installing additional capabilities. So, our objective is to go a little higher in that, but we are working with other suppliers too of course. We don’t want to be completely self-sufficient for obvious reasons. But we expect to reach our objective of getting to the levels we have committed over the next couple of quarters. So yes, if you look at it from what we had expected, we were maybe a quarter behind, but if you look at what we’ve been able to do here it’s quite a remarkable progress from just a year ago.

[Matt Sheerin – Stifel:]

Okay. And on the F&E business, it sounds like you’ve got a lease time horizon as – during which you’re going to decide whether you really want to remain in that business or not. What are some of the drivers behind that, what’s the timeline and would it be sort of just pairing down that business and divesting areas where maybe it’s not a great fit or would you just divest the whole business?

[Per Lööf:]

I think what we said was basically in obvious comments that if F&E doesn’t produce, you got to do something about it. And we have a plan that we believe is going to be successful and returning that company to profitability at revenues – current revenues. We also see the revenues picking up slightly, but we will make those decisions over the next several quarters if the business returns to a reasonable contributing level and if the restructuring goes as we have expected, then of course we’d like to keep the business, we believe the technology is – a it’s a great technology, there are tremendous opportunities for us as I said in particular in combination with some of the NEC TOKIN capabilities that I think will be good for the company long-term. But in the – but having said that, it needs to produce. And we have a plan for it to do well, and I just wanted to make that clear to everyone that nothing is really secret here.

[Matt Sheerin – Stifel:]

Okay. Fair enough. Thanks a lot.

[Operator:]

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

[Wamsi Mohan – Bank of America Merrill Lynch:]

Yes. Thank you. Good morning.

[Per Lööf:]

Good morning and welcome.

[Wamsi Mohan – Bank of America Merrill Lynch:]

When do you expect to have the NEC TOKIN results that you can include. And is it just in this quarter that we’re going to see your results ex TOKIN when you report or is that how we should be expecting you will be reporting and when you file your Q, we’ll see the results of NEC TOKIN in there?

[Per Lööf:]

I’ll turn this over to Bill, but we closed the transaction two months ago – I mean two months – February 1 three months ago. So, it’s taken us a little time to get this ready for a press release. But, I’ll hand it over to Bill, I’m sure you’ll get it in the K.

[Bill Lowe:]

The answer is yes, Wamsi, it’ll be in the K and going forward it’ll be – we expect it to be in time for the press release as well as of course always be in the queue. You’ll have the numbers in the 10-K, when the 10-K is filed.

[Wamsi Mohan – Bank of America Merrill Lynch:]

Okay. And can you give us some preliminary sense of what that number is for the quarter?

[Per Lööf:]

Yeah, if I could have done that, Wamsi, I think we probably would have put it in the press release....

[Wamsi Mohan – Bank of America Merrill Lynch:]

Yeah.

[Per Lööf:]

So, the answer is no, I can’t provide that today. We’ll provide that in the Q once filed.

[Wamsi Mohan – Bank of America Merrill Lynch:]

Okay. And can you address, and acquisitions being closed for a few months. Where you when do you expect NEC TOKIN equity earnings to turn positive like which quarter should we be expecting positive contribution from NEC TOKIN equity earnings?

[Per Lööf:]

We’ll get to that when we start to see the results coming. But let’s just look at the NEC TOKIN business for a second. You have a tantalum or cap business that was completely shutdown to the Thai flood. That plant is now, which was a little over a year ago and that plant is now up to speed and we now have the equipment installed and getting production to come back up. So that is really the factor that’s hampering their ability to produce positive results as we speak, the other businesses, whether that’s EMC or EMD are taking along pretty well. And some of them are actually basically sold out. So it’s A little difficult at this point since we don’t have any of these results to comment on when will they be positive. But I think you should look at this as a if you look at our agreement, I think you look at this, if this is a couple of years that we’re going to spend getting the company to work together and what we were able to do today or announce today was of course the fact that we are taking we’re getting some synergy benefits at this point from this activity by being able to shift some of the work over to our friends in Japan and Thailand that we are taking advantage of, and that’s where we were able to take the synergy benefits already this quarter.

[Wamsi Mohan – Bank of America Merrill Lynch:]

Okay. Thanks Per. Then can you give us, Bill, may be the operating margins by segment in the quarter?

[Bill Lowe:]

I think actually Wamsi there

[Per Lööf:]

They’re on the website slides.

[Bill Lowe:]

They’re on the website slides. Let me just see if I can draw your attention to the page number, if you turn to the slide 10 is the channel gross margins for the quarter which was 14.7% for the quarter. On slide 11, Ceramics, adjusted gross margin is 33.3% and Film & Electrolytic was a negative 5.8%. So, those are on the web presentations on the slides 11 to 13.

[Wamsi Mohan – Bank of America Merrill Lynch:]

Yeah. No. Thanks Bill. I meant operating margins?

[Per Lööf:]

Well, you know, that doesn’t change, the only thing that is below the gross margin for these guys is a little bit on a native R&D and their native SG&A and operating margin will be in the Q and the Ks when we put those out.

[Wamsi Mohan – Bank of America Merrill Lynch:]

Okay. And then last one from me, I mean, I understand the mix issues and obviously you had some one-time issues here on the tantalum supply chain, but can you give us some sense of – you’ve had several tranches of restructuring and that was sort of last like 1.5 years, 2 years. Can you give us some sense of how many – how much of the dollar benefit that you’ve actually recognized from the restructurings? I mean F&E is coming close to an end, Blue Powder vertical integration should have contributed I think about $7 million relative to like three or four quarters ago. There were other restructurings that were announced in July of 2012 and also in November of 2012, if the pull on tantalum facility restructuring which I think is yet to come. So there are lot of different moving pieces and I’m just wondering, how are these tracking, are we at a point where all of these are actually flowing in at the appropriate expected amount but then you have certain one-time issues that are offsetting that in the quarter, is that the right way to think about it?

[Per Lööf:]

Yeah. The answer is yes. If you take the activities, they are all part of a longer plan that we have had and we’ve been able to – and then we announced them as we put them into place as you would expect. But clearly the tantalum activity that we announced in November, will happen over the next couple of quarters and has to do with automotive qualification again. So it’s going to take a little time to do that and we expect that to be finalized in the next – not this quarter, but the next quarter. In terms of the vertical integration, yes that’s tracking on time. It tracked – it was tracking on expectation in March. Actually, what I said, we had some one-time issues that took a couple of months to sort out. But that should be tracking on-time, tracking in line with expectation and the F&E restructuring is going actually as expected. So we believe what we’re saying at this point is, is basically with the exception of this one-time issue in the ore situation or in the mine situation, we are tracking on expectations. I don’t know Bill, if you want to comment some more on this.

[Per Lööf:]

No. No. Thanks.

[Wamsi Mohan – Bank of America Merrill Lynch:]

Yeah. Thanks, Per. Thanks, Bill.

[Per Lööf:]

Thanks Wamsi.

[Operator:]

And 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 two numbers I couldn’t find yet and hopefully I didn’t miss them. What was R&D in the quarter?

[Per Lööf:]

R&D was...

[Bill Lowe:]

It’s about $7 million.

[Per Lööf:]

Less than $7 million for the quarter, probably didn’t see it if they’re separated out. Give me just one – you have, what’s your second number...

[Ana Goshko – Bank of America Merrill Lynch:]

Second one, I just want to know of your cash balance, how much of that is unrestricted and how much is restricted?

[Per Lööf:]

Okay. Let me talk to this for a second.

[Bill Lowe:]

I guess to let me give her the first number?

[Per Lööf:]

Yeah.

[Bill Lowe:]

$6.7 million on the R&D.

[Ana Goshko – Bank of America Merrill Lynch:]

Okay.

[Per Lööf:]

Yeah. The restricted, what is referred to as restricted, is about 17 million. But we...

[Ana Goshko – Bank of America Merrill Lynch:]

Okay and is – go ahead.

[Per Lööf:]

Yeah, but we are able to utilize that for those purposes, of course.

[Ana Goshko – Bank of America Merrill Lynch:]

Right and so most of that is related to that customer prepayment, I think that was in ceramic, correct?

[Per Lööf:]

Yeah, correct.

[Ana Goshko – Bank of America Merrill Lynch:]

Right. Okay.

[Per Lööf:]

Uranium and tantalum.

[Ana Goshko – Bank of America Merrill Lynch:]

Are those in tantalum? Okay.

[Per Lööf:]

Yeah.

[Ana Goshko – Bank of America Merrill Lynch:]

And then so secondly, could you give us a sense, I know you’ve got some upcoming payments from the blue powder, like what are the payments that you might expect in the coming quarters and the root of what I am trying to get to is, your comfort with your cash balance as you look to, payments that you have upcoming?

[Per Lööf:]

As I think, I have said on a couple of different calls, on an annual basis, this next fiscal year will pay $20 million on our deferred purchase price for Niotan. The next payment is due I believe in August and then a $10 million payment in February of the following calendar year. So it will on our last fiscal quarter, so those are the two payments that’ll be due this quarter. No other funds are scheduled to be paid out with the exception of those two for Niotan.

[Ana Goshko – Bank of America Merrill Lynch:]

Okay.

[Per Lööf:]

And of course when we talk about – we talked about CapEx that includes what we are spending on the OEM contract.

[Ana Goshko – Bank of America Merrill Lynch:]

Got it. And then are you – are there other payments related to NEC TOKIN that are anticipated in this fiscal?

[Per Lööf:]

There are none.

[Ana Goshko – Bank of America Merrill Lynch:]

Okay. And then I think it would be helpful, there are some issues that came out with – in one of the credit rating reports this last quarter that highlighted some concerns about a potential put that NEC would have in the next calendar year. I just wanted to understand under what circumstances – just clarifying for people, under what circumstances that put right come into play?

[Bill Lowe:]

Let me talk about that just briefly and then hand it over to Bill. Yes, there is a put in it, but if they put it, they have to finance it, simply put.

[Per Lööf:]

It doesn’t, it comes into play after our call option period and EBITDA has to be at a certain level, but to Per’s point I think the main point from a credit perspective is that if they were to put it to us, it doesn’t mean KEMET has to go out in the marketplace to raise capital, simply it would be a simple situation where they would have to finance the debt that’s on the books there, which equates to basically what the purchase price is. So therefore, the parent company will be effectively financing the transaction at current rates with financing today which basically...

[Per Lööf:]

Less than 1%.

[Bill Lowe:]

Japanese right, so it’s not exactly a big negative.

[Ana Goshko – Bank of America Merrill Lynch:]

Got it.

[Per Lööf:]

I wouldn’t let them to do this but...

[Bill Lowe:]

We’re not expecting that, but it is not – it is – we talked a lot about the protecting the downside as we did this transaction and I think that’s one of the things we asked for that as well.

[Ana Goshko – Bank of America Merrill Lynch:]

Okay, great. Thank you very much.

[Operator:]

Your next question comes from the line of Amitabh Pasi with UBS.

[Amitabh Passi – UBS:]

Hi this is Amitabh with UBS.

[Per Lööf:]

Hi.

[Amitabh Passi – UBS:]

Just wanted to clarify a comment Per, just sort I understand I think you said CapEx for this fiscal year $30 million to $40 million and then there is an incremental $20 million for Niotan?

[Per Lööf:]

No. Niotan is not a CapEx, that’s the payment of the transaction and that’s an incremental $20 million that we are paying. One in – $10 million in August and $10 in February.

[Amitabh Passi – UBS:]

Yeah, yeah sure, okay. I just want to make sure from a cash use perspective it’s $30 million to $40 million plus another $20 million?

[Per Lööf:]

Yes.

[Amitabh Passi – UBS:]

Okay. And then I wanted to clarify, Bill the restructuring actions you announced today I think you said $3.8 million savings to be fully realized by September. Would that flow through COGS or would that be in SG&A?

[Per Lööf:]

It’ll be both actually. But, it’s all – it’s all indirect folks, some above the line and some below.

[Amitabh Passi – UBS:]

Okay. And then what was the number you gave for the full fiscal year?

[Per Lööf:]

12.3.

[Amitabh Passi – UBS:]

12.3...?

[Per Lööf:]

It’s really a little bit this quarter and then three times 3.8.

[Amitabh Passi – UBS:]

Okay. Perfect. And then I guess just on F&E, Per or Bill, just trying to understand why is that revenues are sort of stabilized at sort of where we are right now for about three quarters, but margins continue to deteriorate in the same issue but just still struggling to understand what is going on, on the margin front there?

[Per Lööf:]

Well the margins fluctuate a little bit in that business, there is mix in this number of – as we take some of these actions, they flow into inventory before we actually are going to realize the benefit of it. And what we’re seeing also is that we – as these restructuring efforts we have – we’re doing them or we’re making the investments, but it takes longer to get them to realize. But as I said we expect them to be fully implemented by the end of this calendar and therefore in the last fiscal quarter, we should be able to see the full benefit of those activities.

[Amitabh Passi – UBS:]

Okay, got it. And then just ASPs, do you have any color on how ASPs trended?

[Per Lööf:]

Yeah, ASP is trending flattish is our expectation at this point and in some of the tantalum business that have actually stabilized. So, I think flattish is this is – just a pretty decent new from what we’re saying at this point.

[Amitabh Passi – UBS:]

And then just want to...

[Per Lööf:]

No real erosion as well getting.

[Amitabh Passi – UBS:]

Okay, perfect. Final one for you Per, just curious what are the trends you’re seeing in your telecom end market as you look over the next two to three quarters?

[Per Lööf:]

What we’re seeing is, we saw a pretty soft beginning to the year – the calendar year.

[Amitabh Passi – UBS:]

Yeah.

[Per Lööf:]

But we’re seeing increased activity from all of our telecom partners in the next couple of quarters. So, I think we’re going to see additional expenditures, additional CapEx expenditures from the telecom providers, which of course will benefit the OEMs in this business over the next couple of quarters. The connectivity demands are just increasing and therefore they need to be put these investments in place. And that’s going to benefit our company.

[Amitabh Passi – UBS:]

And your exposure there is more to wireless?

[Per Lööf:]

Our exposure, that’s where the business is, so that’s where we are of course.

[Amitabh Passi – UBS:]

Yeah, okay.

[Per Lööf:]

Base stations on wireless is really where we are mostly prevalent.

[Amitabh Passi – UBS:]

Okay, perfect. Thank you.

[Operator:]

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

[Hamed Khorsand – BWS Financial:]

Hey good morning. A couple of questions, one is this – the cyclicality in the industry has always been around, but this time it seems as though we’re going through a longer period, I mean given the guidance you provided, we’re talking about eight quarters of really almost no real growth at all in the revenue line. How much longer you think the industry needs to adjust before we see any real material upswing?

[Per Lööf:]

Last year, the pundits were expecting the second of 2012 to actually gain momentum, that didn’t happen as I’m sure you know. And this year they’re predicting kind of sluggish and slowish increases over the next couple of quarters. It was reported this morning, that point to the fact that CapEx investments are likely to increase over the next couple of quarters. And we kind of follow the end demand of these activities, and it is hard to predict. We think that the next quarter will be flattish. We saw that this quarter was slightly up. It was up a couple of percent. We see the business is trending slightly up, as we are sitting here and beginning in May but it’s a difficult one to predict. We’ve seen what’s going in Europe. And as I said, our European business was up a 11%. We still see that business to have some growth in it and that’s very good for us. We see some growth as I just talked about, in telecom and infrastructure investments. There is some issues in the lineup of the device business, laptops and various types of other mobile devices and that thing has to sort of checks itself out. So I think that we’re going to see this year be slightly up but not dramatically. I think there are pundits out there that believe that 2014 is going to be a decent year. So eventually the cycle comes back. It’s been a little longer this time around than people have, were expecting, but I think we have reached the bottom and I think we, we are heading towards better territories.

[Hamed Khorsand – BWS Financial:]

In case it brings me to my other question, it has to do with the restructuring you’re doing and do you think if the industry does comeback and the timeframe you just alluded to, would you be cut short with lack of head count and manufacturing capacity and so forth?

[Per Lööf:]

No we’re not, I mean manufacturing capacity is there and what we announced today, we had nothing to do with the actual incapability to produce. So we think we are able to do this, because we see the benefits from the NEC TOKIN investment largely. And therefore we will not be cut short with people or capability as the upturn happens, but of course when it happens the leverage will be nice.

[Hamed Khorsand – BWS Financial:]

Okay. And if I heard you correctly on the call, you said about book-to-bill being over one, does that mean utilizations can go up this quarter?

[Per Lööf:]

It could go up, it could go up.

[Hamed Khorsand – BWS Financial:]

Okay.

[Per Lööf:]

As we’re producing a little more than we did last quarter, utilization is a little higher than it was last quarter.

[Hamed Khorsand – BWS Financial:]

Okay. That’s it from me thank you.

[Per Lööf:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Marco Rodriguez with Stonegate Securities.

[Marco Rodriguez – Stonegate Securities:]

Yeah, good morning, thank you for taking my questions. Most of my questions have been asked and answered, just a couple of quick follow-ups. On the tantalum business and the gross margins, just wanted to get a little bit better sense that 300 basis point decline sequentially, can you kind of quantify what was the supply chain issues from the powder and what was the mix issue?

[Per Lööf:]

Half and half.

[Marco Rodriguez – Stonegate Securities:]

Got it. And then next in regard to the NEC transaction, the announcement here all the cross-licensing and the cross selling, and you guys are obviously trying to protect the downside in regard to the transaction. Should the overall transaction itself not close as expected, what sort of continuities are in place here to kind of take that IP back for lack of better phrase?

[Bill Lowe:]

Well I mean we have, we own, we have 34% ownership of the company at this point and we have 51% voting control on the board. So these and we’ve had cross-license agreement with these folks for long, long time and they really so if we were to exit the relationships somehow, which we have, is not on the cards then we will have to look at that, at that point but at this point we are, this will, if the transaction stays where it is at this point and we don’t increase our ownership then we will continue with this gross license arrangement in perpetuity.

[Marco Rodriguez – Stonegate Securities:]

Got it, thanks a lot guys.

[Bill Lowe:]

Thank you.

[Operator:]

Your next question comes from the line of Scott Russian, Liberty Mutual Group.

[Scott Russian – Liberty Mutual Group:]

Hi, good morning. A couple of questions for you. First, I am just trying to understand kind of the trade off in terms of the weakness in the PCs versus the tablets. Obviously those have been very strong so when I am trying to understand it, do you have less of a presence in tablets, is it the plus design win, is it that they use less. I’m just trying to understand kind of what the trade off is there.

[Per Lööf:]

Yeah. They use less, it’s kind of a basic premise there.

[Scott Russian – Liberty Mutual Group:]

Okay.

[Per Lööf:]

They don’t need as much power. And they don’t need as many caps as a result.

[Scott Russian – Liberty Mutual Group:]

Okay.

[Per Lööf:]

The other.

[Scott Russian – Liberty Mutual Group:]

Okay.

[Per Lööf:]

Go ahead.

[Scott Russian – Liberty Mutual Group:]

Okay, the other question I have is just what are the cash impacts of the restructuring actions that you announce incremental actions?

[Per Lööf:]

You mean in terms of the, what the severance payments are, you mean?

[Scott Russian – Liberty Mutual Group:]

Yeah, exactly.

[Bill Lowe:]

We took $1.8 million, correct me if I’m wrong Bill, in the last quarter and we expect to take another $2 million or so in this quarter. And that’s sort of cash impact of this.

[Scott Russian – Liberty Mutual Group:]

Okay.

[Bill Lowe:]

Go ahead Scott.

[Per Lööf:]

And that will, most of that – some of that will be...

[Bill Lowe:]

Will be lot lump sum, will go out over time, so as we paid out as a little salary continuation if you will but you can just look at that as your cash impact as a result of restructuring.

[Scott Russian – Liberty Mutual Group:]

Okay. And then the last question I had was just in terms of the restructuring actions that you’re taking now, so if we assume just kind of flattish revenue for the next fiscal year, do you expect that with these restructuring actions, even if revenue doesn’t improve you can generate positive free cash flow or would more actions be needed?

[Bill Lowe:]

Yeah. Yes and we will actually expect to be net income neutral at these levels.

[Scott Russian – Liberty Mutual Group:]

Okay. Very good. That was all I had.

[Per Lööf:]

Okay. Thank you.

[Operator:]

And your next question comes from the line of Owen Douglas with Robert W Baird.

[Owen Douglas – Robert W Baird:]

Hi, guys. Thanks for taking my question. Just wondering about your liquidity situation, so you guys mentioned you have about $113 million of cash, restricted cash, $96 million unrestricted, I don’t believe that you guys paid any cash interest in the fourth quarter, so just wondering what are your thoughts regarding your liquidity situation, do you think you’ll need to get some more liquidity in the next quarter or so?

[Per Lööf:]

No. We don’t need, we feel comfortable with $113 million of cash, we actually generating cash in the quarter and we expect to continue this as well. We see no issues with our cash situation. We got $113 million in the bank and that’s the planning for us.

[Owen Douglas – Robert W Baird:]

Okay. And you said that you generated cash in the quarter. Can you tell me the working capital, what was the swing on that, was that about $28 million?

[Per Lööf:]

If you look at the balance sheet, swing in the quarter, the majority of the swing as I have mentioned it in my formal remarks is, inventory improvements we had indicated in the prior quarter, that our focus was on reducing the inventories based on where our revenue levels were. So, inventories alone decreased from about $221 million in December to $206 million in March, generating the majority of the change in working capital. There was a little bit of a change in, I think receivables were generally flat, there was a little bit of change in payables as well contributing to that, and then a couple other minor items that moved around to generate that $18 million cash flow.

[Owen Douglas – Robert W Baird:]

Okay. So, excluding the working capital swing, cash from operations, excluding working capital was slightly negative this quarter. Is that correct?

[Per Lööf:]

Excluding change in working capital, certainly because we had an – we started with a net income loss. But cash from operations which includes capital changes of course was positive.

[Owen Douglas – Robert W Baird:]

Okay. And this coming quarter, once you fiscal 2014, should we expect there to be any dramatic swings in working capital, or should things stay steady?

[Per Lööf:]

I think we’ll see further reduction in inventory, and I think the rest of it was pretty steady.

[Owen Douglas – Robert W Baird:]

Okay. Great. Thank you very much.

[Operator:]

(Operator Instructions). Your next question comes from the line of Pauline Spakes with Metal Pages.

[Pauline Spakes – Metal Pages:]

Hello. I would like to ask you, just to elaborate a bit further on the tantalum supply and where you see also the supply and demand for tantalum capacitors balanced in the coming quarters?

[Per Lööf:]

Did you, what did you want me to comment on the supply of tantalum, did you say?

[Pauline Spakes – Metal Pages:]

Yes, on the supply of tantalum, but just on your own supply chain and both of, how you see the market supply being balanced against demand?

[Per Lööf:]

I think we feel very comfortable, let me comment on our situation, and I’ll leave it at that. We feel very comfortable with our supply situation, and I did comment on the issues we had, that we have managed to deal with. So, I feel very comfortable that we’re able to have a very steady and very secured supply at reasonable prices as we go forward.

[Pauline Spakes – Metal Pages:]

Do you continue essentially to budget materials at the rate you expense it from your raw material supply?

[Per Lööf:]

We have a strategy to have large chunk of coarse from our own supply, but we will continue as we have declared to engage with other suppliers as well. We do not intend to be self-sufficient. With that, and of course, we will be able to supply over time, and if (inaudible) with these materials as well.

[Pauline Spakes – Metal Pages:]

Could you elaborate a little bit more about the outlook for tantalum capacitors, specifically in the coming quarters, where you see demand developing?

[Per Lööf:]

Well, as I’ve said, we talked about the situation in Taiwan, which we needed to take a look at. But I think we will see the demand steady. I think we’re seeing a very positive book-to-bill and in our tantalum business at this point. And therefore, I think the outlook is slightly up on the tantalum side.

[Pauline Spakes – Metal Pages:]

Thank you very much.

[Per Lööf:]

Thank you. And operator, we have time for only one more question, if there are any more questions in line.

[Operator:]

We’ve a follow-up with Amitabh Passi with UBS.

[Per Lööf:]

Okay.

[Amitabh Passi – UBS:]

Hi, guys. Just a quick follow-up. I don’t know if you said anything on this. When can we get clarity on NEC TOKIN financials, we’re in May, I think you closed the deal February 1. Just trying to get some sense of, when we can start to get better clarity there?

[Per Lööf:]

We do the K, when we’ll do the K you’ll have it.

[Amitabh Passi – UBS:]

Bill, any – sorry I missed that, any idea when that will be filed?

[Per Lööf:]

By the 30, by the end of the month.

[Amitabh Passi – UBS:]

Okay. All right. Thank you.

[Per Lööf:]

All right. So this is Per. Thank you very much for joining our call this morning. And I wish you all a great day.

[Bill Lowe:]

Thank you.

[Operator:]

This concludes your conference. You may now disconnect.