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Executives

Dean Demke - Director of Corporate and Investor Communications

Per Loof - CEO

Bill Lowe - EVP and CFO

Analysts

Robert Weaver

Omar Sumlat

Ashia Merchant

Joe Whitney

Sabina Bhatia

KEMET Corp. (KEM) F3Q09 (Qtr End 12/31/08) Earnings Call January 28, 2009 9:00 AM ET

Operator

Good morning. My name is Erica and I will be your conference operator today. At this time I would like to welcome everyone to the KEMET third quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Mr. Demke you may begin your conference.

Dean Demke

Thank you, Erica. This is Dean Demke, Director of Corporate and Investor Communications. Good morning and welcome to KEMET's conference call to discuss our third quarter financial results ending December 31st of 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.

As a reminder to you a presentation is available on our website that should help you follow along with the financial portion of the presentation this morning. Please go to kemet.com and click on the investor relations tab on the top right portion of our front page. Once there, please click on the third quarter conference call link that will bring up a few slides that we will call your attention to when we cover those topics.

Before, we begin I would like to advice you that all statements that address expectations or projections about the future are forward-looking statements. Some of these statements include words such as expects, anticipates, plans, intends, projects and indicates, although they reflect our current expectations, these statements are not guarantees our future performance, but involve a number of risks, uncertainties and assumptions. Please refer to our 10-Ks and 10-Qs for additional information on risks and uncertainties.

And now, I will turn the call over to Per.

Per Loof

Thank you, Dan and good morning everyone. Obviously, I don't need to tell anyone on this call that we are experiencing an economic environment that is giving everyone around the world a reason for pause. The short-term will continue to be turbulent, but I’m heartened by the reaction of the world Government that are taking unprecedented action in a coordinated way.

Like many, if not most companies the worldwide recession is having an impact on our business. Our revenue for the third quarter ended, ending December 31, 2008 dropped to $191 million, which is down from $235 million in the quarter ended September 30, 2008 and that represents the decline in our sales revenue of $44 million.

However, we were able to minimize the severity of this drop in revenue through proactive cost reduction measures that we put in place between August and December last year. And this totalled over $50 million on an annualized basis. While it may sound a bit odd to say that I am pleased with our performance this quarter, I actually am -- I am pleased that the team reacted swiftly to the changes in the marketplace, and that we have been able to successfully execute initiatives which we applied to you over the last two quarters.

As a result, our operating income dropped only $900,000 from last quarter, and our gross margins actually increased slightly, approximately 1 percentage point. Our cash balance came within our internal target. We plan to continue to focus our efforts in maintaining inventories to levels which are consistent in keeping with market demand.

This may involve additional temporary shutdowns and of our facilities, which will have a negative impact on next quarter’s P&L, but we'll manifest itself as an additional cash flow during this slowdown. I believe this will indeed position us for a strong revamp, when we start to emerge from the recession and normal activities pretty soon.

The cost reduction measures that I have referred to include the following. The board reduced their annual compensation by 10%, and meeting fees by 25%. Starting with our leadership team, we reduced salaries by 10% for all salaried employees where it was possible, we eliminated our fallen KEMET. We reduced our global workforce by over 20% from a 11500 to around 9300 today, and we are currently running on manufacturing facilities at reduced rates to manage inventories.

We began taking action to reduce our cost structure long before the full knowledge of this severity of the current worldwide recession is understood. We are actively taking these expensive measures has allowed KEMET to suffer through one of the largest quarter-over-quarter decreases in revenue in our company’s history, and maintain our operating results more or less flat on substantially less revenue.

Again, we believe that this is a strong indicator that KEMET now has a cost structure in place that will allow for a quick return to profitability, once the recovery from the rescission begins.

However, we are not just been focusing on reducing costs. We are also working on increasing market shares. One of our growth strategies involve expanding our North American production of our film and electrolytic products, which will position KEMET to be a significant play in the alternative energy and green technology markets.

Demand for energy will continue to increase and alternative energy is an important growth market. KEMET produces the products to support the development of alternative energy and we look to expand operations in the North America in order to compete in this energy market.

Speaking of our film and electrolytic business group, integration of Arcotronics is on target to be completed by March of 2009. We began the customer migration on October 1, and we will be done by the end of this quarter.

The Evox Rifa integration is complete with the exception of the financial integration stocks compliance. And this will be completed by the end of the fiscal year in parallel with the Arcotronics financial integration. I am pleased with this progress, it bodes well for our future.

We continue to make strengthening our balance sheet our priority. We have eliminated the majority of our short-term debt through the closing and opening of a new medium term credit facility and the principle amount of €60 million with UniCredit Corporate Banking.

Proceeds of the credit facility in the amount of €50 million were used to pay off an existing short-term credit facility with UniCredit with the schedule maturity date of December 2008. The remaining €10 million, we used to pay down the facility with UniCredit that will come due in April.

We also paid off an additional €1.8 million of our debt to UniCredit during the quarter. We now have credit facilities of €95 million. In order to deal with the upcoming short term debt which matures in April '09, we have received a commitment from UniCredit for a separate €35 million credit facility, the use of proceeds from this facility will be used to pay off the remaining balance of our April 2009 facility. Closing on this facility is expected to occur within the next few weeks.

We are confident that KEMET is positioned for a strong rebound, because of the actions we have taken and continue to take. These actions include, but are not limited to the following. We have leaned our manufacturing operations that we are continuing to lean it as we move forward, significantly reduced our cost structure, redefine the strategic direction of all three business group, restructured personnel throughout the company to facilitate our changing focus, implemented industry best practices and we have identified and developed growth strategies.

Additionally we continue to invest in the development of our people. I am going to turn over the call to Bill now for a review of financial results. Bill?

Bill Lowe

Thanks, Per. And good morning, I will begin our review on slide 3, which is the income statement highlights. Sales declined to 190.7 million from 234.8 million in the September quarter for a 19% gross decline in revenue. Adjusting for the sale of our Wet Tantalum assets and the exchange rate impact primarily the euro, the decline was approximately 13%.

As Per, previously mentioned the gross margin percent actually increased from 11.9% to 12.7% versus the previous quarter, and R&D and SG&A expenses were 4.1 million less than the prior quarter on a combined basis. Interest expense declined to 4.6 million versus 5.5 million primarily related to exchange rates.

Turning to slide 4, we're reflecting a non-GAAP operating loss for the quarter of 1.9 million compared to a non-GAAP operating loss in the September quarter of 1 million. That reconciliation for the prior quarter can be found on slide 8. Special items in this quarter were primarily severance charges in Mexico, China and Europe related to our actions taken in late December.

Looking now at the balance sheet on slide 5, I would like to highlight a couple of items. First, our unrestricted cash balance was inline with our internal forecast for the quarter and if you’ve read our September Form 10-Q, we did list many of the cash items that will be paid out during the quarter that would decrease our cash balance. I’m pleased to say that those payments are completed.

Additionally, 3.5 million of the restricted cash balance became unrestricted after the [first] of the year and is now available to the company. Capital expenditures were 4.7 million for the quarter, and we expect that fourth quarter capital expenditures will be approximately 3 million or less. We did reclassify the long-term debt put in place in October into long-term from short-term during this quarter.

Our short-term debt was 75 million is primary made up of the €35 million facility that we’re in the process of converting to long-term and the two principle amortization payments on facility A with UniCredit of approximately 9.5 million each due within the next 12 months. Receivable and payable days both did increase at the end of the year, but this was due to both KEMET and customer holiday shutdowns. And as of the today’s day's day they're back inline with prior days outstanding.

EBITDA which is -- can be found on slide 7 was 13.3 million compared to 19 million last quarter. For those of you that like to begin that calculation with operating income or loss, I will refer you back to slide four regarding that calculation. At this point, I will turn the call back over to Per to update you on the individual business groups and the markets, Per?

Per Loof

Thank you, Bill. Starting with the film and electrolytic business, as previously noted the integration is on schedule, and to be completed by the end of this fiscal year. The planned relocation of operations from Europe to Asia is on schedule, as a consolidation on legal entities in Italy has been completed. The plan restructuring and headcount reductions for the third quarter have been implemented.

Revenue for that business dropped 16.6 million or 22%, which in part was due to exchange rate. The exchange rate had a negative effect on sales of approximately 6 million, and margins were negatively affected by about $6 million during the quarter as we decreased our inventories. Turning to the Tantalum business, we saw a lower volume but benefitted from the implementation of cost strategies implemented and from improved ASPs due to more favorable mix.

Sales revenue was 91.7 million, down about 14% from the second quarter, with 3 percentage points on the decline due to the sale of our Wet Tantalum.

Weaker sales was seen in all regions, but as previously mentioned overall ASP’s were better than second quarter. Even so, the Tantalum business improved its gross margin to 20% and operating income was $6.7 million. We did not see the normal Christmas bill this year and due to the additional market softening our orders received in Q3 dropped more than 40% compared to Q2.

Book-to-bill dropped 0.6 to 1 in Q3, however on a positive note last week our book-to-bill has improved to 158 to 1, which could signal that we have hit the [pot]

Looking at our ceramics business, we sold revenue decline 25% in Q3, on a 33% drop in volume. The decline in volume was most severe in Asia, but also evident in North America and Europe as our customers reacted to weakening consumer demand.

Margins improved quarter-over-quarter as a result of significant variable on fixed cost reduction and favorable product mix effects. Order rate continued to be soft towards the end of Q3, but have improved early in Q4.

Now look at our sales business, starting with Asia Pacific. Asia Pacific saw a reduced demand across all channels and all segments. While our backlog into Q3 was only marginally soft, our bookings in the quarter were well below expectation and plan.

The impact of a soft Christmas pull through, the global economic crisis, and an effort to conserve cash by companies and individuals alike had a significant cumulative impact. Distribution was a particular concern as the immediately adjusted backlog and inventory to match the order rate and uncertain forecast numbers.

Looking forward to our fourth quarter, real demand is very cloudy. Customers are now willing to commit orders past what they can see is solid, closing demand that will not be rescheduled or canceled. We see shorter lead time request, which requires to plan production accordingly.

But it is also, of course, puts customer ability to secure and deliver short-term lead time demands at risk. End customers are well aware of the market softness and are asking for price reductions. There is some inventory cleansing going on in the market but given current raw material cost increase as the ability to erode selling prices is going to be very difficult.

Local companies appear to be at higher risk of credit problem, which may show themselves after the end of the Chinese New Year celebrations. This segment is service by smaller Asian distributors that run on very thin margins while relying on steady cash flow to maintain their operations.

Looking at sales in the Americas, businesses Q3 continued to soften as deteriorating economic conditions led to decrease customer demand, which did result of revenue decreasing about 10% quarter-over-quarter. In response, for this weakening demand, customers reduced inventories and took extended production shutdowns over the holiday. Overall backlog decreased in the quarter. Book-to-bill was a negative 0.9 to 1. All segments and all channels experienced softness in Q3 with the exception of defense in medical, which were about flat quarter-over-quarter.

Our distribution channel reduced inventory to allowing the softness in bookings and billings and their turns remain flat quarter-over-quarter. Going forward, I expect Q4 to continue to be challenging as customer struggle to predict true demand. They continue to buy only when they're absolutely convinced they will need it in the short-term. I expect and we are planning for Q4 to finish below Q3.

For Q3 in Europe, we saw quarter-over-quarter decline in sales of around 20% of which half was currency related. The Q3 downturn affected all products and segments in a similar way, but OEM and distributions saw the biggest decline. While the global economic slowdown was the main factor, our own business was affected by the automotive segment and our distribution business was affected by inventory reduction resulting from weakening for US bookings and billings.

As we move into Q4, it is still too earlier to go to get an accurate picture on the market. Many customers across different segments on a reduced working hours and inventory pressures continue to be a real challenge, with customers only buying what they know, they can consume. Indications are, but it is still very early that Q4 sales will finish at best at parity with Q3 with a possibility of continued quarter-over-quarter sales decline.

Revenue by region in the quarter broke down as follows, Asia 38%, Americas 24%, and EMEA 38%. Revenue by business group was F&E 31%, ceramics 21% and Tantalum 41% and by channel revenue came in at 18% for EMS 48% distribution and 33% for the OEM.

The road ahead is not going to be easy, but we are taking and continue to take decisive action to ensure that we as you can see from our cost down actions are managing our situation. And, as the economy emerges from the recession, we will be positioned well.

And, This concludes our prepared comments. We will be happy to respond to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of [Robert Weaver].

Robert Weaver

Yes, a couple of questions here. One, do you expect, how much longer can you expect the working capital to be a source of cash. Two, if you could just layout the schedule for your cash restructuring chart is over the next couple of quarters?

Per Loof

Okay. I will let Bill lead you through the schedule. But, in terms of the working capital, we continue to help us on our cash flow as we go down on inventories and as you see the drawdown in raw actually getting through into finished products and into receivables, and into cash.

So, actually we are predicting and expecting that the cash situation will actually improve in the short-term. Bill, you want to talk something specific.

Bill Lowe

I would say it's definitely a working capital through the -- at least the next quarter through March 31st, we'll continue to see drawdown from an inventory and efforts on receivables through that date and as Per mentioned, we would expect therefore that [ultimating] the day cash balance should increase in March over December.

Regarding your second question, which was restructuring actions and payments, most of the cash that has been required for actions that have already been announced, have already been paid through December, there is a small amount is still due after first year, but its very small.

And at this time, we don't have any actions on the table additionally that we plan to take. We believe that we have taken very swift and significant actions to date, and believe that we will be able to managed at the levels we see with the staffing levels we have today.

Per Loof

I think you know the both when it comes to, you know cost for investments is coming down, as well as the construction costs are coming down, and [most bills] have been are recorded and been taken, so we expect the cash is expected to actually improve in this quarter.

Robert Weaver

Okay, and what was the euro exchange rate that you translated the balance sheet on?

Per Loof

The balance sheet -- we'll give you both numbers, from an income statement standpoint the average exchange rate for the income statement was 132, and the balance sheet I believe ended December at 139.

Robert Weaver

Okay. You still have not closed the second half of the UniCredit facility, correct?

Per Loof

Not the second half, there is an additional €35 million that are -- that we are closing as we speak and we expect to close that in the next couple of weeks.

Bill Lowe

Mid February, probably it will be wrapped in cost.

Robert Weaver

So you have the €95 million facility right now, correct?

Bill Lowe

We have the €95 million facilities, 60 of was converted to a four and a half year note last October, and the remaining 35 million which is due in April will be converted to a long term factoring facility that would have a bullet payment due in 2013, and we expect to conclude that in within a couple of weeks as Per said.

Robert Weaver

So of 95, 60 was converted.

Per Loof

60 was already been done, right.

Bill Lowe

It was done in October.

Robert Weaver

Yeah. So, 4.5 year, the remaining will be converted into a bullet note?

Bill Lowe

It will be, it's a factoring arrangement and it will be completed in the next couple of weeks, and it is a essentially the same term as the facility A, as we can refer to the 60 million as facility A with a bullet payment due or conclusion due in 2013.

Robert Weaver

Okay.

Bill Lowe

No amortization on the 35 million. Look at it that way.

Robert Weaver

Okay. All right. But there will be amortization on the 60?

Bill Lowe

There is semiannual payments on the facility A beginning in April and October.

Robert Weaver

Okay. All right. Thank you.

Operator

Your next question comes from the line [of Joe Whitney].

Per Loof

Good morning.

Bill Lowe

Hello.

Per Loof

Hello, Joe.

Operator

Your next question comes from the line of [Omar Sumlat].

Per Loof

Good morning.

Omar Sumlat

Hello, guys.

Bill Lowe

Good morning.

Omar Sumlat

Good morning. Could you, Bill, maybe you could give me the actual restructuring charge cash number for the quarter?

Bill Lowe

About 8.2 million approximately of cash from restructuring standpoint, which is both current announcements and then cash flow that went out from the both the August announcement and earlier announcements, about 8.2 million.

Omar Sumlat

Okay. Do you have an idea of what will be for the March quarter?

Bill Lowe

There is probably about a 1.5 million to 2 million left in cash flow to go out the door. That will wrap up, that will wrap up.

.

Per Loof

It will actually go out this month.

Bill Lowe

The actions that we announced in December, if you recall the press release for that action will be $2 million. Most of that will occur in this month of January.

Omar Sumlat

Okay. I saw that -- there was a small loss from a sale of assets, could you go into--

Bill Lowe

It was just some -- that's just a miscellaneous equipment and assets of our books that was disposed up, that's not significant.

Omar Sumlat

Not significant, okay. Also, I noticed -- let me see, on the cash flow and I thank you guys for actually providing cash flow early in the quarter. There was a payment of debt of $6 million. Was there anything additional to that €1.8 million that you pay down?

Bill Lowe

Let me take a look.

Omar Sumlat

Or, Maybe I'm--

Per Loof

The €1.8 million according to the statistics to the UniCredit was. So, that's about €30 million, right about.

Bill Lowe

About half of that 3.5 or I don't know what the exchange rate at the time we do. It was somewhere on the mid threes was the UniCredit and I think we have a couple of other smaller, as you know we have some other subsidiary debt around the globe. There is -- it will be 22 million in total and there is some small payments on those as well.

Omar Sumlat

Okay. In terms of the listing of the stock, I was wondering why not the OTCBB, was there something that will be -- prevented you from going into that exchange.

Per Loof

We actually expect to be on that exchange shortly. It's just a matter of timing.

Omar Sumlat

Excellent.

Per Loof

And, so we should be there, we hope very soon.

Omar Sumlat

Okay. Have you guys conducted a stress testing on your cost structure for trough sales levels and the reason I'm asking you that is because of your $60 million covenant of your facility on a 12 months rolling basis.

Per Loof

Yeah. Of course we've -- I would imagine that many companies do this and we have done that too. We have done a very severe stress test on the situation not only because the economic environment is so uncertain. Even at these very depleted levels of revenues, we feel that we are in good shape to insure that we have enough cash or enough EBITDA to be able to meet our June, 30 covenants, which is already starts in June, as you probably know

Omar Sumlat

Exactly. Okay.

Per Loof

You're talking about severe revenue declines not just a few percentage points.

Omar Sumlat

Right, you wouldn't be able to tell us what would be that threshold point.

Per Loof

No.

Omar Sumlat

Okay.

Per Loof

I would, but I don't think that we can at this point.

Omar Sumlat

Okay. Your competitor AVX, the CEO went out on a limb to predict that he saw that the positive was a possible bottom in bookings in the December quarter, and following that he thinks that there could be a possible bottom in sales in the March quarter. Would you care to comment about that or how would you think that would--

Per Loof

I will, our -- my wife's friend on the beach, John would of course always be correct. So, I wouldn't counter his analysis. But, you know honestly speaking I think that March could be the bottom, but again we are looking into unprecedented times and it's hard to predict how this is going to end, but it would seem to us that March would be the bottom at this point. But again that is very, very difficult to ascertain because of the cloudy demand picture that we are seeing at this point.

Omar Sumlat

Okay. Are the plants that were shut down in December, do they continue to be shut down?

Per Loof

No, no. I mean it depends on what business, and which products are being produced, and some all plants right are working and we will have some limited shutdowns. Our facilities during the quarter, and we are of course looking at that on an ongoing basis to see how the demand picture changes. In one particular case, we have already had to cancel the shutdown that was planned in [order recovery]. So it's an evolving picture, and as the demand picture evolves, and the customer situation changes, we will review that on an ongoing basis.

Omar Sumlat

Okay, two more questions. Do you guys getting any exposure to the Nortel bankruptcy on your receivables?

Per Loof

Right now, not really.

Omar Sumlat

Okay. And how is that receivable management going, last quarter you guys mentioned that there was some improvements, on the certain customers that were paying late, anything to report this quarter?

Per Loof

I think they are continuing, I mean managing on our working capital, whether that be payables or receivables, or inventory is not a full as full [court- press] and we are seeing improvements in all of these areas. As Bill mentioned, towards the end of last quarter you know we saw some increases in receivables, and past dues, but they have been corrected earlier in the quarter.

And this was hat were due to the fact that people were taking extended holidays and then plan shut downs and the liken. So, there weren't too many people working to pay their bills towards the end of the year.

Bill Lowe

Nobody was working the cut checks at the end of the year basically.

Omar Sumlat

Okay. On the supplier side, I notice that days increased to 63 days.

Per Loof

That's sort of a normally what we would see. I think the 60 days is probably a good number.

Bill Lowe

It is, but it's spiked up as well, because again we were also shutdown for the holiday period. So I think, we are back into a more normalized state. We have made sure we're keeping our suppliers update on their due dates, so where we can do that. So, I don't think next quarter, I don't believe that the payable days will be that long, nor will the receivable days be that long, but they will slide back down together in sync.

Omar Sumlat

Are you getting any pressure from your suppliers in terms of--

Per Loof

No, no. The supplier s are -- the suppler base is fine. What is also impacting this is, is a move to more Asian suppliers. If you dissect the numbers both on receivables and payables, the Asian receivable days are longer and payable days are longer too. So there is a mix issue that affects our payable days and that of course is by defined from the company.

Omar Sumlat

Okay. That's good news. Can you update anything on the Tantalum prices?

Per Loof

Well, we've said that we've had material price increases and we have -- at this point finalized our discussions with our customers, with the OEM customers and yes, we have been able to working with them to make sure that we've been able to increase prices.

Omar Sumlat

Directly related to the Tantalum powder.

Per Loof

Directly related to the Tantalum powder, yes.

Omar Sumlat

Okay. This not a question, this is basically a comment, last quarter I asked about --

Per Loof

You can also see, that if you look at the Tantalum, the Tantalum business actually improved even in this quarter. So some of those improvements we saw, late in Q3 as well.

Omar Sumlat

Okay. I would still love to see, might as then purchase some stock, last quarter I mentioned it as well. You made references to things that had happened inside the company and the lawyers and all; but I think at this point $0.25 a share, you're priced for bankruptcy. So, I don't think it's going to make a difference in terms of inside information or a thing like that--

Per Loof

Our lawyers are telling us very carefully that we are not -- we cannot buy stock at this time.

Bill Lowe

The fact that we have moved from the New Your Stock Exchange to wherever we are trading once we the Bulls and Bears, the pink sheets; we have the same rules to follow, the same liability issues. So, we follow our lawyers' advice and we are doing so today. So, I think we should leave that one with that answer at this point. So, Omar, do you have another question for us or should we go to the next one.

Omar Sumlat

No, That's it. Thank you very much and good luck.

Per Loof

Thank you.

Operator

Your next question comes from the line of Jim Silva.

Ashia Merchant

Hi. This is [Ashia Merchant] on behalf of Jim.

Per Loof

Hi Jim.

Bill Lowe

Hello, good morning.

Ashia Merchant

Good morning. Very quick question, any plans to get relisted on the major exchanges? Do have any time lines with respect to that.

Per Loof

Well, we clearly --N New York Stock Exchange still has KEM and of course we would look to get re-listed on a major exchange. But at this point we can't really comment on when we think that will happen. But clearly, that's the objective, sure.

Ashia Merchant

Sure. But, is there any timeline, should we look forward to some milestones along the way in terms of filings or paper work that could be publicly disclosed?

Bill Lowe

Some of it of courses is a matter of meeting their listing requirements, and so a lot of that has to do with where are the stock prices and what the market capitalization is and so, there are some dynamics to go along with that and there are certain forces of course to drive those numbers that are somewhat out of our control, except for the performance of the company which we've been discussing today.

So, a lot of it has to do with the recovery of the economy and then the performance of the company as we recover.

Per Loof

And, as we converted a lot of short-term debt to long-term this quarter and we will have another slight that will be converted to a long-term debt in April. And, at that time we have really no short-term debts. So, that's one thing that is happening and clearly we are managing the business to insure that we can benefit for, when the market and the demand picture changes in a positive manner.

Ashia Merchant

Okay. Thank you.

Operator

Your next question comes from the line of Joe Whitney.

Joe Whitney

Hi, can you hear me now?

Per Loof

Yes, hello. Can you speak up a little bit?

Joe Whitney

Sure. This is Joe Whitney with [Longbow] when I was skipped, most of my questions have been answered. But, I wanted to talk quickly about restructuring; you had already mentioned that the charges have essentially been completed through the December quarter. I'm assuming there is going to be an incremental piece of savings that rolls on from the actions that took place during the December quarter. What should we expect maybe on the SG&A line?

Per Loof

The SG&A is continuing to decrease as these things come into play and there were further decreases that we saw in this quarter, and of course from a P&L perspective as we normalize our inventories then of course the P&L affect of the draw down of inventories which will minimize as well. Some of the items that Per went through today on the [fall] especially the some of the 10% roll back on salaries, the 401-k matches effective in the month of January, so we will see a decline in SG&A for March as a result of those actions that were announced in December but actually take place in -- March.

Per Loof

What we were saying is we are looking at, $30 million to $35 million annualized decrease in our cost structure. That some of it was seen in the third quarter and some of it we will only see in the first. As Bill was saying, the salary reductions and so forth will only come into play as of the January payroll.

Joe Whitney

Okay. So I am sure it is difficult to deal without that $30 million or $35 million, is it possible to give an approximation about what piece we are yet to see in the March quarter or is that too tough to do?

Per Loof

There is probably I would say $3 million to $4 million, probably we will see in the March quarter as a reduction. From a cash stand point offsetting that as I mentioned earlier is about $2 million that goes out for severance related to some of the layoffs that occurred in the facilities. But from a financial statements stand point about $3 million to $4 million probably you will see.

Per Loof

Could be more.

Bill Lowe

Could be more, but I think that's a reasonable range that you should look for.

Joe Whitney

Okay. Thanks very much.

Operator

Your next question comes from the line of [Sabina Bahatia].

Sabina Bhatia

Hi. This is Sabina Bhatia. You know, you mentioned that your lawyers have recommended you not to buy stock at these levels. Have you given any thought on buying back your converts at these levels?

Per Loof

I mean, these are also questions that are difficult to answer, as you can well imagine and clearly the convertors are trading at very low price at this point.

Bill Lowe

It is very attractive. We've been talking a lot today about cash. We are looking to build our cash balances to operate through the downturn that we are all facing. So we're prepared to come out of the downturn and be prepared to take advantage of that. While it seems that they are attractive, we are preserving cash to prepare ourselves from upturn to be able to buy the raw material and turn that to finished goods and increase our profits.

Per Loof

The issue here is that we are -- we find it better to be more prudent at this point to focus in on the cash line and to insure that we have as Bill was saying the raw materials to insure that when demand comes back, we have the money to stock up our inventory so we can take advantage of the upturn.

Sabina Bhatia

Sure. Fair enough. But outside of that, do you have any covenants or legality issues that would prevent you from buying back on it.

Per Loof

No, we don't.

Sabina Bhatia

Okay. Great. Thanks a lot.

Operator

Your next question comes from the line of (inaudible)

Per Loof

Good morning.

Unidentified Analyst

Good morning. My questions were actually just answered but--

Per Loof

Okay. All right. Thank you.

Bill Lowe

Thank you.

Operator

There are no further questions at this time.

Per Loof

Okay. If there are no further questions, we appreciate you're being on the call and appreciate you following KEMET and we wish you all a good day and then hopefully the actions that the various governments are taking will have the desired effect. Thank you all. Good day.

Bill Lowe

Thank you.

Operator

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

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Source: KEMET Corp. F3Q09 (Qtr End 12/31/08) Earnings Call Transcript
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