KEMET Corp. F2Q09 Earnings Call Transcript

Oct.29.08 | About: Kemet Corporation (KEM)

KEMET Corporation (NYSE:KEM)

F2Q09 Earnings Call

October 29, 2008 10:00 am

Executives

Dean Demke - Director of Corporate Investor Communications

Per-Olof Loof - Chief Executive Officer

William M. Lowe, Jr. - Executive Vice President and CFO

Analysts

Joe Whitten - Longbow Research

Ingrid Aja - Merrill Lynch

Joe Witten - Longbow Research

Matt Sheerin - Thomas Weisel Partners

Jason Grisky - Citigroup

Omar Semla

Al Sham - MidSouth Capital

Kevin Starke - CRT Capital

Operator

Good morning. My name is Kashina and I will be your conference operator today. At this time, I would like to welcome everyone to the KEMET second quarter earnings conference call. (Operator instructions).

Dean Demke

Thank you, Kashina. This is Dean Demke, Director of Corporate Investor Communications. Welcome to KEMET's conference to discuss our second quarter financial results ending September 30th for fiscal year 2009. On the call with me today is Per Loof, our Chief Executive Officer and Bill Lowe, our Executive Vice President and CFO.

Before we begin, we must advise you that during this conference call, the company will be discussing matters which will be considered forward-looking statements that involve risk and uncertainties and consequently, actual results may differ. Current global economic conditions make it particularly difficult at the present time to predict product demand and other related matters. Please refer to the company's form 10-K and other filings with the SEC for additional disclosures on risk and uncertainties.

During this call this morning, we will be referencing various slides in a presentation posted on our web site. You can refer to these slides by accessing our web site at www.kemet.com and clicking on the second quarter conference call link in the Investor Relations section of our web site. You'll then click on a button called supporting materials.

Now I would like to turn the call over to Per-Olof. Per.

Per-Olof Loof

Thank you, Dean and good morning everyone. It's rather a brisk morning here in South Carolina actually. We had an extremely productive second quarter ending September 30, 2008.

Clearly, we were faced with challenging financial issues that we had to resolve and we did. We successfully made improvements to our balance sheet by reducing debt, even though it was not of our choosing.

Additionally, we have positioned our company for higher margins by reducing our cost structure and laying the groundwork for price increases in a few of our businesses. I am proud of what we've been able to accomplish with regard to the financial and balance sheet challenges that we were facing, especially considering the extreme tightening of credit that has taken place throughout the world.

Obviously, I don't need to remind anyone on this call that we are experiencing a unique economic environment that is giving the world reason for pause. I expect the short-term outlook to continue to be turbulent, but I'm heartened by the reaction of the world governments to take unprecedented action in a coordinated way. I'm convinced that when we all emerge from this crisis, we'll come off stronger.

KEMET is of course living through the same environment. KEMET's truly global focused. Our balanced business viewed from a geographic and segment perspective, in particular, the fact that we are less reliant on the consumer market, thus giving us some cushion, a cushion that we didn't have a year or so ago.

As we come out of this downturn, we should be able to emerge as a much stronger KEMET. So what have we accomplished this quarter?

As announced on our last call in July 2008, we began to rationalize corporate staff and manufacturing support functions in order to reduce cost and position KEMET to achieve our financial objectives. Approximately 640 were affected as a result of this action. We announced in July that we expected to reduce our support costs by approximately $24 million for the remainder of this current fiscal year, which translates to approximately $36 million on a full year basis. We are on target to meet the expected cost savings. We saw savings in this quarter and we will see significantly higher savings in the quarters three and four, as we only received a portion of the benefit in this current quarter.

As you may recall, because of the non-cash goodwill charges we had to take in our first quarter, our senior notes came under pressure as a result of a minimum network covenant. The company obtained waivers from our note holders and the issue was resolved 48 days after our earnings release.

With the funds generated from the sale of our Wet Tantalum assets, we prepaid our obligations, including the outstanding principal balance of 40 million. Together with all accrued interest and a prepayment penalty, in total over 43 million. Please note that we had been and were at the time of the prepayment in compliance with all financial covenants under the senior notes.

Additionally, we replaced our short-term debt obligation, due in December of this year with a new medium term credit facility in the principal amount of €60 million, with UniCredit Corporate Banking Corporation in Italy. We actually drew it down in this quarter on October 21st.

€50 million were used to pay off the existing short-term facility with UniCredit with a scheduled maturity date of December 2008, and the remainder, €10 million were applied to the facility that will come due in April 2009. We also paid €1.8 million of our debt to UniCredit, leaving a total balance of €95 million, down from €96.8 million.

In order to refinance the upcoming debt due in April '09, we have received a commitment from UniCredit for a separate €68 million credit facility. This facility will be used to pay off the remaining balance of the April 2009 facility.

Closing is expected to occur as soon as factoring arrangements are put in place; but in any event, no later than April 2009. The practical mechanisms are being worked as we speak. Through these actions, we have eliminated immediate concerns related to our debt that was due on a short-term basis.

Let's now take a look at our second quarter results. If you follow along with our web site presentation, I will begin with slide number three, Income Statement Highlights.

On a non-GAAP basis, we are reporting a loss for the quarter of 3.6 million, or $0.04 a share. Although we are not pleased with these results, they are a vast improvement over the previous quarter in which we reported a non-GAAP loss of 17.5 million, or $0.22 a share. Net sales were 234.8 million, up 37.7 million over the same quarter last year, but down sequentially by a little over 8 million compared to the June 30, 2008 quarter.

SG&A expenses declined to 22 million, or 9.4% of sales from $25.9 million and 10.7% of sales in the prior quarter. R&D expenses declined 3.1 million versus the prior quarter, primarily in the ceramic business unit. These reductions are specifically related to our restructuring efforts announced on July 31st this year.

If you now please turn to slide four. On a U.S. GAAP basis, we reported a loss for the quarter of $83 million or $1.03 a share and this includes an impairment for goodwill of $85.7 million, a gain on sale of assets of $28.6 million, restructuring and integration expenses of $20 million, $2.2 million related to our debt retirement and $1.2 million related to a write down of the value of the facility that we sold during the quarter.

Looking now at slide number five. Our adjusted, consolidated EBITDA for the second quarter was $19 million, up from $6 million in the June quarter. We have provided a reconciliation on slide six of how we determined adjusted EBITDA in order for you to easily review our calculation using the variables listed.

Moving to the balance sheet on slide seven. Cash was up slightly by $600,000. CapEx for the quarter was 11.8 million, and $23 million to date, for the fiscal year. Regarding cash, we also paid out approximately $2.8 million for severance payments during the quarter. The remaining slides are reconciliations of our GAAP to non-GAAP financials for your review.

To summarize, we believe our second quarter showed significant progress and improvement over our first quarter. Although still a long way from where we believe we will go, we are well positioned heading into the third and fourth quarters. Sales fell slightly but not an unpredictable level considering the market atmosphere that we are currently facing and the large share of European business that we now enjoy. In fact, we actually believe we are faring rather well considering the current economic environment.

I was pleased to see the decreases in our overhead expenses by a significant amount over last quarter and this clearly demonstrates that the actions we took at the end of our first quarter are having the intended effect. Simply put, we are aligning our overall cost structure to the environment we are in.

Let me continue with an update of each of the three business units, starting with film and electronics. Integration activity is now continuing full steam and we are now back on track. I am convinced that this business will in a way redefine KEMET, for example, by giving us the needed technologies and customer relationships to play a significant role in rapidly-growing segments.

We continue to develop our green applications. As I've just said, we strongly believe that these emergent technologies offer significant growth opportunities as well as healthy margins. It is however difficult to completely comprehend how this business will do in the short term given the uncertainties surrounding the markets.

We could argue that this business is driven by GDP growth; however, I somewhat beg to differ. These applications are likely to somewhat redefine the marketplace. Just listen to the presidential debate in this country. It will take time to fully develop but it will happen and KEMET is well positioned to partake in this growth.

Book-to-bill for the F&E group was 0.8 for September and is now increasing slightly. Our backlog is healthy and we have a lot of orders to work with at this time. Our revenue for the quarter was 76 million, a slight decrease over last quarter but mostly attributed to factory shutdowns in Europe during the summer.

Lower euro to U.S. dollar exchange rate will impact our top line. 70% of our F&E revenue is in euros but the margins on the U.S. dollar business will improve because the majority of the costs are in euros. In all, this is a net positive for us. The decline of the Mexican peso and all the European currencies, not just the euro, will help us. We're a dollar-based business with a large cost base in Europe and in Mexico.

Turning to our tantalum business group. We saw some lower volume but higher margins. Sales were slightly down from the first quarter but mostly from the sale of our Wet Tantalum business. Sales revenue was almost 107 million and it was up in America, down a little bit in Europe and Asia.

The current order rate is down about 5% versus the second quarter but book-to-bill is holding at 1.0 as of today. We view this as a positive considering the pervasive negative view regarding the so-called Christmas slowdown.

Our ceramic business saw slightly lower volume but higher margins, a clear indications that the actions focused on shutting low profit margin business to strengthen the bottom line is actually working. Sales were down just slightly over our first quarter with a reduction seen across all regions.

As for Q3 for ceramics, we expect our favorable cost trend to continue. However, as have been stated by my industry colleagues recently, the current market conditions are very difficult to assess. Revenue may of course potentially be negatively impacted.

Due to a relatively balanced business, we only expect to see 4% to 7% quarter over quarter decline for us in the ceramics business. The price erosion we have seen and the high CV in the ceramics business will continue at least for now and at least in Asia. The silver lining possibly for us is that we have been attempting to attract from some of this business.

I estimate that it may take over a year before the high CV business starts to behave normally. The advent of additional capacity and a global slowdown in consumer products was just too much to absorb, hence DSP erosion. We're concentrating on specialty products in the U.S. and Europe.

Looking at sales starting with Asia. We actually finished the quarter with a strong sales performance above what we were expecting. Distribution POS sales were also above expectations. Tantalum and F&E products were the strong performers, ceramics less so. However, we did begin to see a drop in orders at the end of the quarter as continued global financial concerns caused our channels to go conservative. We saw our distribution customers begin reducing orders to keep inventories under control in anticipation of softer demand.

Looking forward to our third quarter, as I said, there is an over supply of ceramics products in the market which is driving prices lower. End customers are aware of this and asking for reductions as a result. Credit could also become an issue for smaller Asian distributors as they work on very thin margins and rely on steady cash flow to maintain their operations.

Our Asian book-to-bill for Q2 was 102, with the current book-to-bill however coming in below par. In tantalum, this is because we do not have adequate supply for our Asian customers. We are, as we speak, looking at increasing our capacity for just our Asian customers.

Looking at channel demand, the current market uncertainty is spreading and to forecast demand in the short term is very difficult.

In the Americas, overall industry demand did soften in Q2 and I expect this trend to continue in Q3 as the overall economy weakens. Our customer base is now more cautious every day about future demand. However, our book-to-bill at the end of September was 102 and it's actually a little higher now in late October. I guess we may be gaining market share.

The automotive segment is weak and it will continue to be weak for some time. And while much of this is already built into our current numbers, we expect softness through the end of the fiscal year and well into fiscal end. Aerospace, defense and medical segments are stable and are expected to remain so moving forward. The industrial segment in the Americas did okay but Q2 may suffer a bit as the market continues to erode moving forward. EMS is soft overall and it's expected to remain so.

To summarize, from where we are now, four weeks into Q3, we expect the U.S. to be flat quarter over quarter. In Europe, we finished Q2 ahead of our projections with a book-to-bill for the quarter of 1. Q2 sales were down 6% quarter over quarter; however, given the fact that Q2 in Europe is usually the toughest quarter due to European vacations and factory shutdowns, we see the overall performance as satisfactory. Both this and EMS perform well. Ion struggled somewhat.

As with all markets, Europe in particular is a difficult one to read at this time. From a product perspective the ceramics base continues to be ultra competitive with overall capacity in the market and the clear driver tantalum is showing some weakness while the F&E products seem to be maintaining strength.

Looking at the market by segments, we're seeing the following. In the computer segment, specifically notebooks, we're not seeing the usual holiday bill. Some of this is mix related as the smaller form of product, which require fewer of the low ESR tantalum product, are keeping the bill numbers up but lowering demand overall. However, our polymer business is running all out and it's expected to do well even in the current quarter.

Telecom infrastructure is starting to see some headwinds and the handset forecast of $1.28 billion still looks good. The mix will be poor. This will of course impact even our business to a slight degree.

The consumer market is seeing no holiday bounce expect for gaming. And as I said, automotive demand is off 15% year over year in the U.S. and 5% in Europe and will continue to affect our business negatively.

The medical market is stable and aerospace should be relatively stable with some potential growth as demand for fuel efficient planes and business jets seem to remain solid. Additionally, military spending is stable.

Looking at the industrial segment, while this is a mostly GDP-based business, green and power applications worldwide show signs of strength even with oil falling as much as it has in recent weeks. The underlying fundamentals haven't changed.

Looking more broadly, we anticipate a small decrease in sales revenue for us, maybe 3% to 7% in our third fiscal quarter ending December 31st, 2008.

KEMET is, as I mentioned, somewhat sheltered from the depressed consumer markets. We're not a major player in consumer applications unlike many of our competitors. While we certainly will not be unaffected by the economic downturn, we believe we may not be as greatly affected as others. Our move forward is focusing on the specialty markets including the emergent green technologies we believe will serve us well.

In summary, we so see ahead what everyone else is seeing. As a consequence, our cost containment and integration efforts are progressing at increasing speed. The reductions that we announced previously are on track and we expect to continue to progress even in the current quarter.

Four weeks in, we anticipate that revenue will decline but so far, we haven't seen all that much. Barring unforeseen challenges worse than we are seeing at present, the December quarter will produce improvements for sales.

This concludes my prepared remarks and I will and we'll be happy to respond to any of your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). The first question comes from the line of Joe Whitten, Longbow Research.

Joe Whitten - Longbow Research

Good morning. This is Joe on the line for Shawn Harrison. My first question is you obviously saw some decent restructuring savings coming online. I think last quarter, we had said that the incremental piece coming on in the December quarter would be essentially one more month. Is that still the case and really, what is kind of the dollar amount of incremental savings?

Per-Olof Loof

It is one more month for the U.S. piece but the piece that is in Europe is probably two months. So I'd say it's probably a month and a half or so coming into December. And actually, some of that because of the way these things are laid out. Some of it actually came in in this quarter as well, so you're going to see the full effect in Q4 and a bit more in Q3 and even more in Q4.

Joe Whitten - Longbow Research

Is it possible to put a range on that amount?

Bill Lowe

What we said is the overall savings is $36 million a month but one more million on top of the savings we've seen on a quarter to date. So about $3 million a month so we gave out a million dollars.

Joe Whitten - Longbow Research

Thanks, that's helpful. Then moving down, with all the refinancings that have gone on, it looks like interest expenses take down. Just through all the changes that have been made, what should we expect there?

Secondly, there is still a decent chunk of short term debt I guess on the balance sheet. Just hoping you can walk through when all those maturities take place. We know about the April piece but what are the plans for the additional piece?

Per-Olof Loof

That's the one that's actually short-term, that €35 million that we have a commitment. I'll let bill go into the details but basically, the €35 million that we are going to deal with in April was part of the overall package that we discussed with the bank. So the fact that we're doing it in April really has to do with the fact that that’s going to be a particular factoring arrangement and it's just going to take us time to get there. So it's more of a timing issue than anything else. And that's €35 million. I'll let Bill take it over.

Bill Lowe

We drew the loan down on the €60 in October, which is post-balance sheet date. So the classification has remained short term on the balance sheet this quarter. But specifically talking to the amortization on the principal on that, again, it's four and a half years. It's semi annual payments over that period so nine equal installments over the four and a half years beginning first payment in I believe April of 2009.

Again, the rate, if you recall from our previous disclosures is LIBOR plus 170 basis points. So that is the longer term piece. All of it is sitting in short term at this balance sheet date and then as Per said, the remaining €35 million we are working to put the factoring in place to collateralize that and move that into the right pot on the balance sheet as well.

Joe Whitten - Longbow Research

Okay. And then just with regards to the interest expense, should we expect a similar amount that we saw in 2Q?

Bill Lowe

Yes. What's remaining going forward is the 2.25% rate on the outstanding notes of $175 million, plus again the €95 million which is all priced at LIBOR plus 170. And of course, since we are U.S. dollar based and that's a euro-based loan, there is some arbitrage there on the rate.

So if you calculate that on a static exchange rate, you'll get a number that might be slightly different than we end up with for the quarter only because as we calculate the exchange rate from the euro to the dollar.

Joe Whitten - Longbow Research

Okay, thanks. That's very helpful. Then two basic questions I guess. The diluted share count, I didn't see it in the release and then I was wondering if you had a preliminary cash flow from operations figure.

Bill Lowe

We used 80.4 last quarter. I don't think it's changed substantially from last quarter. So I would say we're still using the 80.4 on the share base. We haven't put out that cash flow statement yet and we'll have that out in the Q.

Per-Olof Loof

But the cash improved slightly in the quarter.

Bill Lowe

But if you just look at the cash balance, if you just think about it for a minute on the headlines we gave you with the slides, cash went up slightly on a total basis by about $600,000 as Per said. We paid out almost $12 million in CapEx for the quarter. We also paid out cash flow of $2.8 million for severance.

Of course, it’s not in the P&L; it goes against the accruals on the liability side of the balance sheet. I think you should see some positive numbers there. If you just look at it on a macro basis, you can see that we did generate—

Per-Olof Loof

We were pleased with our cash performance, given the fact that there was a lot of outgoing happening in the quarter. We actually moved out our accounts payable a little bit.

Bill Lowe

I think you see a bit of working capital improvement. You have to be careful as you look at the balance sheet on a stand alone basis in that again, we do have a currency impact. Those currencies have changed. But when you wash out the currency effect, there still is a net benefit from working capital improvements between the basis of AREP and inventory, and we continue to work on that. We're continuing to work on reducing our working capital so that we will put more cash in the bank and that's definite.

Per-Olof Loof

Our target is five times for the businesses and some of them are a little closer than others but basically, that's the target for all the businesses.

Joe Whitten - Longbow Research

All right. I'll bow out and let someone else step in. Thank you.

Operator

The next question comes from the line of Ingrid Aja, Merrill Lynch.

Ingrid Aja - Merrill Lynch

Good morning. How are you?

Bill Lowe

Good. How are you?

Ingrid Aja - Merrill Lynch

Good, thanks. I was wondering if you could expand a little bit about the order rates that you're seeing in October and have you seen any push outs on shipments?

Per-Olof Loof

The order rates, as I've said, are down a little bit and it varies. The Asian one is a bit difficult. You need to sort of put a little caveat on the Asian one because we didn’t have any products to ship.

We basically were running flat out on the tantalum side so we are going to put some additional capacity or ship some of that stuff to our Asian customers which I believe will improve that order rate. But we are slightly below one at the moment.

In terms of sales, we are thereabouts in terms of where we were last quarter, so I guess in one sense, we do expect the quarter to be down slightly and we gave you a bit of a range for that, which is where we see it for today. But in terms of what we are seeing this moment in the quarter, we haven't actually seen it yet, but we fully expect it to occur.

Ingrid Aja - Merrill Lynch

Are you accounting for any additional plant shutdowns by some of your customers in that?

Per-Olof Loof

What we also need to understand is that we don’t really play much in the consumer segment in Asia and that's really where we're seeing the segment shutdowns. An indication maybe for you, as I said, our polymer business which is really only computers and high-end cell phones is really what that is.

That business is completely sold out and we expect that to do well in the quarter. So that's one indication of that particular segment, which typically is against the high end of both the computer and the cell phone marketplaces.

We do hear that some of our partners are going to shut down for a week or two and we will have to figure out how that will affect us. I'm not saying that it won't but what I'm saying is that for us, the consumer segment is relatively small and in Asia, it's even smaller.

Ingrid Aja - Merrill Lynch

What about European auto?

Per-Olof Loof

We're seeing, 3%, 4%, 5% slowdown there and we have to look and continue to assess how that's going to affect our business. We see some but not of course as dramatic as we had seen in this country.

Ingrid Aja - Merrill Lynch

If you could go in to ASP declines that you're seeing, what you're expecting going forward.

Per-Olof Loof

We see ASPs going in the right direction across all businesses actually. Even in our ceramic business, our ASP improved. Some of that is due to mixed changes and concentrating on different markets and so not having as much high CV business.

Our KO business is holding. I think there is as we look to that business going forward I would think there will be an opportunity possibly to have more decent pricing in that business as well, but we're not counting on that.

In the MNO2 space we are seeing opportunities for us to have a more balanced and better margin picture for us. In F&E we have increased prices as we've told you before and those are starting to kick in and we see those holding in some of the film segments.

So where we are and we may not be the one to compare with, where we are we see opportunities in a couple of spaces in terms of realigning our margins which we need to do and so far, so good I guess is all I can say.

Ingrid Aja - Merrill Lynch

Well, on that note, if you're able to get some of these price increases, where do you think your gross margins can go from here? Do you see them improving even or at least holding even with the decrease in sales?

We expect margins to improve.

Ingrid Aja - Merrill Lynch

Okay, great. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Matt Sheerin with Thomas Weisel Partners.

Per-Olof Loof

Hello, Matt.

Matt Sheerin - Thomas Weisel Partners

Good morning.

Per-Olof Loof

Good morning.

Matt Sheerin - Thomas Weisel Partners

So regarding the sale of the Wet Tantalum business to Vishay, could you tell us what the revenue run rate was and how much of it did you recognize in the September quarter?

Per-Olof Loof

The revenue was about $4 million run rate revenue.

Matt Sheerin - Thomas Weisel Partners

A quarter?

Per-Olof Loof

A quarter, yes. But for a little north of four. And in the last two weeks of the quarter which was Vishay had the business, it was about 1.5 million, that we didn't recognize it.

Matt Sheerin - Thomas Weisel Partners

Okay, and was that—

Per-Olof Loof

It's going to have to be recognized.

Matt Sheerin - Thomas Weisel Partners

Okay, and was that profitability in line with your overall enterprise or more or less?

Per-Olof Loof

It's profitability in line with our specialty business. Actually a little less than our typical specialty business, but it's a good margin business.

Matt Sheerin - Thomas Weisel Partners

Okay. And Per, you spoke about—

Per-Olof Loof

We wish, we share luck.

Matt Sheerin - Thomas Weisel Partners

And you spoke about general trends in regions and products, but could you give specific numbers on your product breakdown, Tantalum, et cetera?

Per-Olof Loof

Sure, I mean Tantalum was 108.8 in Q1, was 106.4 in Q2. So down 2.4 of which 1.5 is the Wet.

Matt Sheerin - Thomas Weisel Partners

Okay.

Per-Olof Loof

So almost a big majority of that is the Wet and some of it also was currency, the fact that the Euro was lower. So that makes 53.2 to 52.5, so it's 700,000 decline. F&E went from 80.8 to 75.9 and that was the $5 million or so.

And that really comes from the— I mean we were shut down for several weeks as well. And the markets in Europe tend to be shut down. This is a very Eurocentric business as you probably know.

If I take the regions, the regions in the U.S.was down slightly from 57 to 55. Amea was down more and it was 101 to 94 and that again comes with the factory shutdowns. Asia was up 2.5 million from 83.8 to 86.2. So I don't know, do you want the segments as well or—

Matt Sheerin - Thomas Weisel Partners

Sure.

Per-Olof Loof

Okay. Telecom was 53.4 down to 51.7, computer which gets to the point I was making before was up from 36.4 to 39.9 and a lot of it at Asia, a lot of it is polymer. Consumer was down slightly from 24.3 to 23.5.

Industrial was down from 70.4 to 61, that's almost a $10 million drop and that has to do with the European factory shut downs as you would expect. Automotive was down from 34 to 32.9. And mil, medical and others were 24.3 to 25.8, so that was up a little bit.

Matt Sheerin - Thomas Weisel Partners

Okay, that's very helpful. And just your commentary compared with we've seen a lot of companies report and give conference calls whether it be your competitors but also semiconductor companies, your biggest distributors.

Your tone just seems to be more positive in terms of what you're seeing in expectations where you've got some of your distributors' guiding down 10, 15, 20% sequentially some of your competitors and some of your counterparts are seeing the same thing basically, distribution not ordering book to bill 0.8 or below in Asia.

And I guess I guess I understand what you're seeing on the polymer because there's some tightness in supply and the seasonality in notebooks and handsets. But I guess the rest of your business, it just either you're taking market share or inventories are lean. I'm just trying to reconcile the difference between what you're saying and your customer and your colleagues are.

Per-Olof Loof

Yes, I can't really comment on what my colleagues are seeing, but of course all of them operate in bigger segments than we operate. And we are, in one sense, more narrowly focused, so whatever happens to them is going to be different than for us.

I think the fact that we have taken a decision to not focus on the consumer segment and ceramics in Asia in particular is making us less vulnerable. But we guided down 4 to 7%, so I mean it's not that we're not going to see anything of this. We're going to see some of this.

The U.S. meltdown, almost, in automotive, we've already seen. I mean that's already in our numbers and therefore maybe our data looks a little different.

Matt Sheerin - Thomas Weisel Partners

Fair enough. I appreciate that and just a lastly, given both the financial stress that you were under during the quarter, have you seen any negative implications in terms of relationships with customers, concerns of whether your distribution customers or OEM or EMS customers about your financial stability and whether that's led to lost market share or not?

Per-Olof Loof

We haven't seen any customers pull away from us. We've had some conversations and clearly they probably are listening to this call, as well, to see whether we've been able to solve some of these issues. So I think people were heartened by the fact that we quickly resolved the senior notes and also quickly resolved the short-term debt with Unicredit.

And they are going to see whether we are continuing to be as supportive as we've been in the past and we are, so we're there, ready and willing to continue to support our customers. Clearly, when you have these situations the conversation is there and you have the conversation and you explain what you're doing and what's happening and then the customers have in this case continued to be very supportive.

Part of the reason why I think we also can be a little positive is that there's a lot that we're currently doing which had nothing to do with the overall economic situation around the world that had to do with restructuring. Ensuring that we put the resources in the right places, ensuring that we rationalized our infrastructure, our SG&A cost, our R&D cost and also clearly in the F&E business, making sure that we have the footprint in the right place. And of course, as we see these things coming to fruition that has a positive impact for our company.

Also I mean we're a dollar-based business with a huge cross base in Mexico and Europe or in European based currencies, not just in the euros then. And of course all of this right now is helping us some. So that is one of the reasons why we may not sound so negative.

But don't get me wrong, I mean we are part of the same environment. And we're seeing head winds like everybody else and we are looking at CNBC every morning and wonder what's going to happen today, so—

Matt Sheerin - Thomas Weisel Partners

No, I appreciate that and you make some good points. Just as a follow up though, your comments about a dollar-based business. What percentage of your revenue is recognized in dollars versus other currencies?

Per-Olof Loof

The 70% of our European business or 70% of 400 million, so that's 4 times 7 is 280, is non dollar-based, the rest is all dollar-based.

Matt Sheerin - Thomas Weisel Partners

So, you mean 30% is not?

Per-Olof Loof

70% of the European business.

Matt Sheerin - Thomas Weisel Partners

Is non-dollar based?

Per-Olof Loof

Is non-dollar based, correct.

Matt Sheerin - Thomas Weisel Partners

Okay. I got you. Alright, thanks a lot and good luck.

Per-Olof Loof

But I mean 100% of the cost in Europe of course in European based, right? We have a lot of activity in Europe relative to manufacturing and engineering and so forth and those of course are Euro based.

The two big, if you look at where do we have most of our manufacturing activity, the biggest place in Mexico and then the rest is basically evenly distributed between Asia, split between Indonesia and China and in Europe. So the cost base is a lot in Europe, but even a lot of the activity or the sales in Europe is dollar-based.

Matt Sheerin - Thomas Weisel Partners

Okay, thank you.

Operator

Your next question comes from Jim Suva with Citigroup.

Jason Grisky - Citigroup

Hey, good morning. This is Jason Grisky (ph) calling in for Jim. Just a couple—

Per-Olof Loof

Good morning.

Jason Grisky - Citigroup

Good morning everyone. Just a couple quick questions on the Tantalum, first, I think you mentioned you had some shortages in fulfilling customer requests in Asia during the quarter. And I remember a couple quarters ago, you had some issues with bringing capacity online. Are you still having that issue?

How much business do you think you left on the table, so to speak, this quarter? And you had mentioned that you might be shipping some of the stuff from other regions, I'm guessing it's going to come from Mexico to fulfill some of these requests? Would the margin profile as a result be any different if you're having to do that?

Per-Olof Loof

What we're seeing the demand are on the larger case size products where the margin profile is very similar region by region. And that's where we're going to see if we can reallocate/increase capacity to satisfy these Asian customers. We do believe we can sell it if we had the product. So that's what we're doing now relative to and it's amenable opportunity or issue if you like.

In terms of the discussion we had a couple of quarters ago relative to our yield performance in our Suomussalami facility, that had to do with the organic polymer production. That was where all of the stuff was actually then moved from Simpsonville and Mexico to our Chinese facility.

And we did experience some yield issues in that quarter. And we are continuing to work that and the yields are improving. They're not quite where they need to be, but they are improving month by month and I would expect it to be at the normal standards in a quarter or so.

Jason Grisky - Citigroup

Is there any way to quantify what you may have left on the table?

Per-Olof Loof

Well, if we had more capacity, I'm sure we could have sold a number of millions more. But I mean it's something that you consider and think, what did I leave out and what did I do and it's always hard to really put a hard number on that. But clearly there were opportunities that we weren't able to fill.

Jason Grisky - Citigroup

Okay, great. And then on the pricing of the tantalum powder last quarter, you talked a little bit about the dynamics that are going on there, some of your competitors have talked about it on earnings calls in the last week or so. Can you give us an update from your perspective on where we are today, tantalum pricing?

Per-Olof Loof

Yes, there are and it's a fluid situation. I think what has happened just recently relative to the price of oil and also the overall commodity pricing picture globally may impact this conversation as they continue. We are in negotiations for the next year now.

We do expect the tantalum powder prices to go up. We do believe that we have opportunities either through engineering, activities that we're doing and also through using other suppliers as well to mitigate that. But clearly there's going to be an increase in powder.

Jason Grisky - Citigroup

When you say use other suppliers, is that for other materials?

Per-Olof Loof

Not other materials. I mean just shifting our load around between the various suppliers a bit to optimize what we need and as we engineer our products better, we can use less charge powder meaning cheaper powder to get the same performance, of course that's something that the labs are working on.

But having said that, we all see as my colleagues have said any increase in powder prices and we're trying to mitigate that best we can, but we also realized that these costs will have to be transferred to consumers or to customers.

Jason Grisky - Citigroup

So you do think that there will be price increases that will go through?

Per-Olof Loof

There will be price increases for us when we will have to do price increase in our term.

Jason Grisky - Citigroup

Okay, great. And then just a couple of bookkeeping questions. The CapEx for this quarter, can you perhaps give an outlook for the second half of '09? What your tax rate might be for the year and then lastly, what you would expect for SG&A dollars in the coming quarter?

Per-Olof Loof

Okay, I'll let Bill comment on the tax rate because that's too complex for me. But on the CapEx, we are on a downward slope in terms of additional CapEx expenses. And we're going to see that drop significantly this quarter and next quarter and basically because we need to sort of look at how we're spending on money, but also many of the actions we have taken over the last number of years are coming to close.

We have moved all of tantalum to Asia to where we wanted even in Mexico and Asia. We have moved all ceramics to Mexico and shortly we will also have moved all the things we need to move from Europe to Asia as well, so that investment is coming down. So the CapEx for the rest of the year maybe will be less than 10 million.

William M. Lowe, Jr.

Yes, we're 23 year-to-date, a number in that 30 million range which we discussed really in the last quarter in the 28, 30 million is not a bad number used.

Jason Grisky - Citigroup

Okay, and then the tax rate?

William M. Lowe, Jr.

And the tax rate? Yes, when you look at our financials, the tax with what’s on the face of the financial statements since we have reporting a GAAP loss. And we do have net operating losses that have accumulated from a tax perspective. So that we do create a valuation allowance.

So what you're really seeing on the financial statements at the moment is really in a way the cash taxes that are being incurred in our European jurisdictions where we pay tax. Going forward as we move from the loss category into the profit category, I think it will have more closer akin to a statutory rate with certain reductions.

So it could be probably for your purposes of your modeling something, as we move from negative to positive, I think I would just use the normal statutory rates and I think that would be a way to look at your model.

Jason Grisky - Citigroup

35, 40% range?

William M. Lowe, Jr.

Yes, the tax effect on those state rates so somewhere in the 35% is where the financial statements look. Although from a cash standpoint, since we have an allowance, it won't actually be cash. It would go out the door, but the financial statements may have a number that's closer to a statutory rate.

Jason Grisky - Citigroup

Okay, and the SG&A dollars, the December?

Per-Olof Loof

Well, the SG&A dollars for this quarter was 22 and we expect that to come down further in this quarter.

Jason Grisky - Citigroup

And then maybe just a question inside, given what you've just come through, I think a lot of investors are obviously trying to follow the cash pretty closely. I'm just curious as to why it's not possible at this time four weeks after the quarter ended not to give us a GAAP cash flow from operations number?

William M. Lowe, Jr.

Well, we have had a lot of ins and we want to make sure that what we put out there which we're filing a Q here in just a few days, is active. Because there has been a lot of activity and a lot of inflows and outflows and that number, we want to make sure it's very accurate and so we haven't reported it to you today.

Jason Grisky - Citigroup

Okay, that might be a number that's useful for investors to go forward basically.

William M. Lowe, Jr.

I would agree with you and the goal would be to have one for you as we report on the quarter.

Jason Grisky - Citigroup

Okay, great. Thanks, guys.

Operator

Your next question comes from the line of Omar Semlat (ph).

Per-Olof Loof

Good morning.

Omar Semlat

Yes, hi. Good morning.

William M. Lowe, Jr.

Good morning.

Omar Semlat

I just had a question regarding the adjusted EBITDA that you used in your presentation. Is that the same as the cash EBITDA that is in your loan agreement, financial covenant, would that be the same number or is it a variation?

Per-Olof Loof

It isn't exactly, but I'll let Bill go through that.

William M. Lowe, Jr.

Right. It would be different. We presented this way for you to allow you more to compare apples to apples between quarters, point out the extraordinary items if you will or special charges or special gains, I should say.

From the bank agreement which is an EBITDA calculation, the difference really would be two things. Number one is these carve outs for impairments and special charges we have for asset write-downs and severance accruals, which you already pulled out here. But then we would add back any cash that went out the door for severance expense which we said was 2.8 million, so that would come off of the 19.

But the gain on sale of assets is not a carve out in the bank agreement, so gain or loss, the sale of assets is not carved out in the agreement. So essentially you could take the 19, subtract the 2.8 cash outflow, add back for the purchase of our Wet Tantalum assets and you'll get a number that's approximately $44 million for the quarter from a bank EBITDA standpoint.

Per-Olof Loof

So if you look at that, we have another I mean what I'm saying this is what we're going to do, but it is 16 million more to get to the 60 million.

William M. Lowe, Jr.

So the 60, you could look at the 60 as a floor, I mean we're not particularly concerned about the 60 covenant calculation if that is the direction of your question.

Omar Semlat

Yes, yes, I just wanted to get a sense of the reconciliation.

William M. Lowe, Jr.

Yes, it's pretty much what you see here except that there are carve outs in the agreement is essentially start with our pre-tax number, add back the traditional interest and depreciation, amortization, any impairment charges that are non-cash of course, severance accruals. But then subtract any cash that goes out the door that would have been against prior accruals and that's essentially the calculation.

Per-Olof Loof

And add back any asset sales too

William M. Lowe, Jr.

Well, the asset sales are pre-tax numbers so they already be buried in the pre-tax number.

Omar Semlat

Yes, I also wanted to ask if you could give a little bit more detail on the gain of the asset sales. Is that only, I am guessing not, but would that be only from the Tantalum?

Per-Olof Loof

Yes, that is the Wet Tantalum business we sold.

William M. Lowe, Jr.

And this quarter that is all we sold, the gain on the wet Tantalum assets.

Omar Semlat

Okay. I mean that's just an amazing fact that your stock right now is valued almost precisely at what you received for that one plant. You own over 20 plants. You had a gain of $28 million on that sale.

William M. Lowe, Jr.

I think to further point out that we did not sell a plant, we simply sold assets which were contained inside our plant, so it was only a very small portion of a facility, not a plant, so I think to your point that's even more incredible.

Omar Semlat

Right. Do you have any comment at all on the performance, I mean I know that you cannot comment directly, but just thinking about those numbers makes you realize how ridiculous the price is today of that stock?

Per-Olof Loof

I couldn't have put it better myself.

Omar Semlat

Another question regarding account receivable collections obviously in this environment, you obviously have been able to lower your accounts receivable from last quarter to this quarter. Are you seeing any problems, and if you are what kind of measurements are you taking to further improve the collections of accounts receivables?

William M. Lowe, Jr.

Yes, I actually expect if you look at the slide you see that our days receivable actually are quite high at 73. The days didn't change much because of the sales declined slightly, but I do expect to see an improvement days outstanding of our receivables in this current quarter, end the December. We're not seeing anything new.

We've actually and we mentioned this in the last call, we have had our receivable balances are higher than they should be with some customers who are behind on their terms. But nothing new and we are seeing as we're going out and clearing up some of the issues that may have created those balances that those amounts are being paid. So I do expect to see continued improvement in the receivable balance as a result and our days outstanding to actually decline somewhat.

Omar Semlat

Right, and just lastly, as an investor, I would love to see senior management like you guys buying some shares in the open market and showing some confidence in your company. That would be a great confidence builder for the rest of the market and hopefully drive out these shores that are putting pressure on your stock.

Per-Olof Loof

Yes, we would love to, but we really can't, I mean there's been too much and during this period there's been too much going on and our ability to buy stock at this point time is I think is zero.

William M. Lowe, Jr.

As we continue to take some of these actions as you would expect imagine we'd be blacked out from being in the market and so—

Omar Semlat

You mean as management?

Per-Olof Loof

As management.

William M. Lowe, Jr.

As management, yes.

Per-Olof Loof

You may think that we are done with all the things we are contemplating. Of course, we're not done. There are lots of activities going on to continue to shore up the balance sheet. So therefore our ability to go and buy in the market, as our lawyers told us, it is not possible for us or for our board to buy shares at this time.

Omar Semlat

Okay, understood. Thank you gentlemen and good luck.

Per-Olof Loof

Thank you.

William M. Lowe, Jr.

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Al Sham (ph), MidSouth Capital.

Per-Olof Loof

Good morning, Al.

Al Sham - MidSouth Capital

Yes, gentlemen. Good morning. If I didn't look at the price of the stock and I just look at the actions that you've taken, I mean it is really incredibly impressive what you guys have done in this environment.

I mean I'm kind of following up on the last caller's comments. The price is just insane. So one if you would make a comment on that.

Number two, what about the feasibility of maybe selling another division, realizing some more cash, maybe then doing a tender for some stock. You know doing some financial engineering along those lines.

And then thirdly, it looks like financial restructuring is done, are you very confident that Unicredit can perform and hold up their end of the bargain?

Per-Olof Loof

I'll take them in reverse order, yes. On the Unicredit, yes, absolutely, I think we have spent a lot of quality time together over the summer as you would expect.

Al Sham - MidSouth Capital

Right.

Per-Olof Loof

And it came to a mutually agreeable situation end in an unprecedented complicated environment as I'm sure you can appreciate.

Al Sham - MidSouth Capital

Right.

Per-Olof Loof

So they were as interested as we were to come to a very good solution and I really applaud the senior management of Unicredit for how they worked with us to get this whole situation resolved and finding the solution which I thought was pretty clever on their part in terms of how we actually move forward, so that on the one hand.

In terms of your suggestions regarding further financial engineering as you called it, clearly we are looking at all opportunities to ensure to build shareholder value and I'd love to comment some more, but as you can well understand, this is probably not the format to do it, but we take your suggestions of course to heart here.

And on the first part regarding the sanity or not of our stock price, I mean the market is the market. But clearly we have a somewhat different perspective as to what this company is and what it does.

And we do produce great product in a myriad of applications around the world as necessary. And continue to enjoy great support from our constituents out there, customers and suppliers. We're looking forward to ensure that the performance improves and therefore that will reflect itself in how the market views it as well.

Al Sham - MidSouth Capital

Okay, one last final follow-up question. You feel good about the financial restructuring. Pretty much most of the heat is off your back at this point in time and you can work well within the loan agreement you've got?

Per-Olof Loof

Yes.

Al Sham - MidSouth Capital

Is that a fair statement?

Per-Olof Loof

That's a fair statement.

Al Sham - MidSouth Capital

Okay. Thank you and keep up the good work.

William M. Lowe, Jr.

Thank you.

Per-Olof Loof

Thank you.

Operator

Your next question comes from Kevin Starke, CRT Capital.

Kevin Starke - CRT Capital

Good morning. I just wanted to make sure I had your capital structure down correctly. Right now you have a total debt of about U.S. $311 million. But the €60 million term loan, the remaining 35 million unsecured term loan, the convertible senior notes and I guess maybe about 14 million in other borrowings, is that about right?

William M. Lowe, Jr.

We have the loan that was part of the transaction with Vishay which was $15 million.

Kevin Starke - CRT Capital

Okay.

William M. Lowe, Jr.

And there's a small component, within a few European subsidiaries, there's maybe another $20 million of debt that's scattered amongst a few subsidiaries that was left in place at the time of the acquisitions a year or so ago.

Per-Olof Loof

But part of the Evox acquisition.

Kevin Starke - CRT Capital

But there's still 35 million unsecured Unicredit facility out, is that right?

Per-Olof Loof

Correct. At the present time, that's correct. That's the fees that we're working to factor and we're working to put that in place today.

Kevin Starke - CRT Capital

The balance still total 175 million?

Per-Olof Loof

That is correct.

Kevin Starke - CRT Capital

Okay. What would your fixed charge coverage ratio be as of the end of the last quarter?

Per-Olof Loof

For our bank?

Kevin Starke - CRT Capital

Yes, yes. How is that calculated under the new secured term loan?

Per-Olof Loof

It's well in excess of the minimum required for the bank.

Kevin Starke - CRT Capital

Okay. Obviously you locked in a kind of a high EURIBOR rate. When is the next reset?

Per-Olof Loof

Well, it does float and I have to look at the changes. Actually the EURIBOR hasn't changed—

William M. Lowe, Jr.

Unchanged.

Per-Olof Loof

When you look at the rates, LIBOR had changed dramatically more than EURIBOR so—

Kevin Starke - CRT Capital

Yes.

Per-Olof Loof

It really isn't substantially different than what we were looking at as we entered the agreement.

William M. Lowe, Jr.

I think it's like between 6.5 and 7 in total.

Kevin Starke - CRT Capital

Right.

Per-Olof Loof

I think maybe it changed 20 basis points or 25 basis points in the time frame we talked about.

Kevin Starke - CRT Capital

Right, I'm just curious when the next reset be, the three months reset, six month reset.

Per-Olof Loof

I have to go back and look at the agreement myself. I think maybe if you give me a follow-up call, I'll give you that answer.

Kevin Starke - CRT Capital

Okay. Aside from your cash balance, what sources of liquidity do you have?

Per-Olof Loof

Well, we're looking at using working capitals well. We currently do not have a revolver and we had said that as we work through the issues we worked through the last 60 days plus. One of the things we would like to see down the road is some form of revolver here that will allow us to have a backstop if you will.

But I think as you see we held around on cash in a quarter where we had standard CapEx and cash flow for severance, et cetera. So I think we'll generate sufficient through operating right now and hopefully through working capital initiatives.

William M. Lowe, Jr.

And as we've said, we continue to review other strategic initiatives that may be deemed beneficial to the company. And we're looking at all of these and the evaluating and we expect some of those things come through as well.

Kevin Starke - CRT Capital

The new secured term loan is only secured by basically European assets, right? So you have the ability to lean up some U.S. assets?

Per-Olof Loof

It's primarily European and the shares of a couple of subsidiaries there.

William M. Lowe, Jr.

It's basically the buildings in Italy.

Kevin Starke - CRT Capital

Again, you probably have the ability if you wanted to get a revolver—

Per-Olof Loof

Yes, certainly. Let's put it this way, there are other assets available to collateralize across the company.

Kevin Starke - CRT Capital

Right, thank you for your time.

Operator

There are no further questions.

Per-Olof Loof

Okay, if there's no further questions, we appreciate your being on the call this morning and we appreciate your interest in KEMET and we're looking forward to talking to you in a few months and thank you and have a great day.

William M. Lowe, Jr.

Thank you.

Operator

That concludes today’s KEMET second quarter earnings conference call. You may now disconnect.

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