Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

William M. Lowe, Jr. – Executive Vice President and Chief Financial Officer

Per-Olof Loof – Chief Executive Officer

Analysts

Ana Goshko – Bank of America Merrill Lynch

Sherri A. Scribner – Deutsche Bank Securities, Inc.

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.

Marco A. Rodriguez – Stonegate Securities, Inc.

Hamed Khorsand – BWS Financial, Inc.

Eugene Julius Fattore – Lazard Capital Markets LLC

Anthony A. Venturino – Federated Investment Management Co.

Swaraj Chowdhury – Dalton Investments LLC

KEMET Corporation (KEM) F2Q 2014 Earnings Conference Call October 31, 2013 9:00 AM ET

Operator

Good morning. My name is Tasha and I will be your conference operator today. At this time, I will like to welcome everyone to the KEMET Reports Second Quarter Earnings for Fiscal Year 2014 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Mr. William Lowe, you may begin your conference.

William M. Lowe, Jr.

Thank you, Tasha. This is Bill Lowe, Executive Vice President and Chief Financial Officer. Good morning and welcome to KEMET’s conference call to discuss our financial results for the second quarter for our fiscal year 2014. Joining me on the call today is Per Loof, our Chief Executive Officer. We are speaking with you today from our newest facility in the KEMET family in Pontecchio, Italy. And as a reminder to you, our presentation is available on our website that should help you follow along with the financial portion of our presentation this morning.

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

Now, I will turn the call over to Per. Per?

Per-Olof Loof

Thank you, Bill, and good morning and good afternoon everyone. As Bill said, we are speaking to you today from our newest sales facility in Pontecchio, near Bologna. It’s, size wise, about 20,000 square meters or approximately five acres. It will house all of our activities in Italy, manufacturing of primarily application specific or specialty product as well as our innovation center for films caps, AC and DC. We are in the process of installing equipments, as we speak, starting with our metallization capability.

We will after this call be conducting our global talent for employees worldwide from this facility. We were earlier this week in Skopje and Kyustendil, Macedonia and Bulgaria, and these investments now nearing completion will allow us to be much more competitive. We can now see the end of our three-year restructuring effort. In Macedonia, we are at this point, producing about four million pieces a month, on our way to eight million. We have installed the new metallization facility in Bulgaria as well, which will significantly reduce our material costs. Simply put, our investments are starting to payoff, much more to come in the following quarters.

If I were to write a headline for this quarter, it would read revenue up 5% exceeding expectations, bottom line improved substantially and the margin improved inline with what we had communicated. We took significant step forward this quarter with a positive operating profit and we are, as projected, on the path to return to profitability. As we have said on our calls for a couple of quarters now, we are very focused on our bottom line performance even in a market that may continue to be relatively flat from a revenue perspective.

We are very pleased with the progress towards profitability and while we did not get to a net income breakeven this quarter, which of course is our ultimate goal, we can see the light at the end of the tunnel and a path to a 10% operating income performance inline with our timeless model.

Revenue, as I said, actually exceeded our expectations and rose 5% to $212.7 million and gross margin increased 350 basis points, compared with the previous quarter. The tantalum supply chain hiccup from last quarter is now essentially behind us. We are still working through some higher priced material through our December quarter, but our own K-Salt facility is up and running at pretty much full speed and supplying the K-Salt we need to produce the power we require. Our objective is to manufacture about 80% of our powders ourselves and we are now approximately three quarters there. Margin will continue to improve as we go forward and we have today produced 76,000 kilos of K-Salt in our new chemical plant.

Our joint venture partner, NEC TOKIN, also turning an above passing grade with revenue up 10% compared to Q1, and an improvement in the bottom line quarter-over-quarter of $5.5 million, reducing the net loss from $8.7 million in the first quarter to $3.2 million this quarter. We believe that the cooperation between KEMET and NEC TOKIN is having a positive effect on both companies. We are very pleased with the new management of NEC TOKIN and through our involvement directly with the NEC team, believe we will continue to see improvements in operating results as well as cash flows. As with KEMET, we can see a path to profitability for our JV partner. Bill will provide a little more detail on the financial results shortly.

It is a pleasure to be speaking with you today from our newest facility. We are, as I alluded to, on the last leg of our restructuring program. Our Italian organization and the completion of this facility, allows us to begin the final movement of equipment and closure of facilities to lower or fixed overhead across Europe. The move of equipment has, as I said, already started into this facility this month and will be completed in June 2014.

In Macedonia, we [indiscernible] as I said; Dallas very pleased with our progress and we are now ramping up in others. The support and the cooperation of the national government and our employees have been excellent, for a manufacturing guy like myself, it is truly nice to see.

Now, I’ll turn the call over to Bill to discuss our financials before I cover the reviews and business units with you.

William M. Lowe, Jr.

Thanks, Per, and good morning, everyone again. I’ll begin our review on Slide 4 if you are following along on the website and the deck there. Net sales of $212.7 million exceeded our forecast and were up 4.9%, compared to the prior quarter of June 30, 2013 of $202.7 million. Our non-GAAP gross margin as a percentage of sales was 14.8%, compared to 11.3% in the prior quarter, up 350 basis points as Per said earlier.

On Slide 3, our GAAP loss reflected for the quarter was $0.29 per basic and diluted share and our non-GAAP loss, which is reconciled on Slide 8, was $0.13 per basic and diluted share. Adjusted EBITDA for the quarter was $16.6 million, up from $7.2 million for the prior quarter ended June 30. Turning back now to Slide 6, our adjusted non-GAAP SG&A expenses were $21.1 million, which was down from our forecasted SG&A for the quarter and from the prior quarter of $23.6 million.

On Slide 11, total capital expenditures during the quarter were $8.7 million and we expect capital expenditures for our third fiscal quarter ending December to be in the range of $4 million to $5 million, and for the entire fiscal year to be $28 million to $31 million. Cash in bank at September 30 was $72.3 million, including the $21 million drawn from our revolver and is within the range we stated during our presentation at the Deutsche Bank Conference earlier this month.

As we’ve also previously forecasted, we expect to see our cash balance decline just a bit further in December quarter and then begin to build back up in the fourth fiscal quarter with help both from operating performance and inventory decreases to a balance fairly similar to what we see this quarter. As a reminder, we will make our bond interest payments tomorrow, November 1, of approximately $18 million.

I’d like to conclude my comments with both our forecast and some remarks about NEC TOKIN’s financial performance. As Per said earlier, we continue to be very pleased with the progress of NEC TOKIN. Revenue in the second quarter came in at $135.1 million, which is up 10% over a $123.2 million of revenue in the first quarter. EBITDA for the quarter was $12.9 million and our share of their net loss was $1.2 million on a U.S GAAP basis, and their cash remained healthy at $83 million.

Now regarding our forecast for the next quarter, we continue to maintain a slow growth view. Our revenue continues to be hard to predict as others in our industry have also said. However, we see revenue picture is essentially flat, maybe just slightly up 1% over the September quarter. The September quarter was a bit stronger than we anticipated and the month of December is always a hard one to predict. As we’ve have said many times though, the story line this fiscal year is more about increasing margins and improving the bottom line. We expect the gross margins will improve an additional 150 to 250 basis points from the 14.8% this quarter to a range of 16% to 17.5% in the December quarter. Our SG&A and R&D should remain relatively flat quarter-over-quarter.

Now, I’ll turn the call back over to Per to discuss a few of the markets, our business units and some comments about the NEC TOKIN joint venture. Per?

Per-Olof Loof

Thank you, Bill. First let’s take a look at the Film & Electrolytics business. F&E restructuring is on track and the team is hard at work completing the final stages of this program. Revenue increased to $55 million in Q2 from $53.3 million in Q1 or 3.2%. Margin improved by $3.8 million in Q2, compared to Q1. This is the first quarter for sometime that F&E generated cash from operations. while we are not where we need and want to be yet, we have a solid plan in place and it is working. We had previously stated that Q2 will be the turning point for this business unit, and presumably, you can clearly see the improvement.

We believe that the cost reduction actions will continue to be reflected in our financial statements next quarter with an additional improvement in operating income by approximately $1 million with further improvement in our March quarter and also into fiscal 2015. Even though our restructuring program, as we have defined it, will be completed in mid 2014, we see further means to improve our cost competitiveness as well as further enhancing revenue opportunities through our R&D efforts.

As you can well imagine, many of our best technical resources have been deployed in our restructuring effort, and since that is now nearing completion, they can go back to go their real job, creating products that align our customers.

Brief comments about the solid capacitor business. In Q2, the tantalum product line revenue improved over Q1 to $100.2 million; up 6%; mix improved and we turned in a stellar manufacturing performance. Manufacturing cost performance improved by approximately $4 million, driven by vertical integration and improvement in yield and 67% of our tantalum powder came from our vertical integration efforts in Q2.

In the ceramic product line, Q2 revenue was $57.5 million, up 4% from Q1, strong OEM revenue from the automotive, defense and aerospace segments, offset weakness in distribution. Excess ceramic commercial product capacity continued during the quarter, driven by the Asia supply base, resulting in ongoing ASP pressures.

Regarding our sales by region, Q2 revenue in the Americas finished up 13.8% at $67.8 million as compared to Q1, driven by strong demand from automotive, defense and aerospace segments. We ended Q2 with a positive book-to-bill of 1.12 and our order rate remains healthy as our ratio is currently at 1.22. Our distribution POS business remained stable throughout the quarter and inventories declined slightly. During the quarter, we began to see signs that the industrial market is starting to recover, which bodes well for the future.

In EMEA, revenue decreased 5% from Q1 to $69.5 million as we experienced the normal effects of the summer holiday season, actually a bit less than we had anticipated. We finished Q2 with a positive book-to-bill of 1.08 and we continue to see encouraging signs from the market as our current ratio is at 1.20. Our distribution POS business increased slightly in the quarter and inventories remained flat. Going forward, we expect to see demand improvement from our industrial and automotive segments.

In the Asia Pacific region, revenue increased 8% over Q1 to $75.5 million, driven by strong demand from our telecom and automotive segments. During the quarter, the notebook segment continued to remain soft and we expect this to continue in Q3. We finished Q2 with a book-to-bill ratio of 1 and this ratio has currently improved to 1.0.

Two very encouraging signs in the quarter were the growth in both OEM sales and in our EMS performance broadly. Combined, they were up a sliver above 10%. Total [indiscernible] and ODM sales were down just slightly. Since this the inventories did not grow, there might be further opportunities in this channel in the next few quarters as well. Needless to say, we are pleased that our current plan to improve our margins came in as expected and we do not see anything on the horizon that should hamper our efforts in the near-term.

It is, as Bill said, always difficult to predict the December quarter. One would typically see a slight decline from the September quarter. Even though I would like to caution everyone that the month of December can be a bit of a challenge, to-date we are ahead compared to Q1, 10% in orders and 12% in revenue quarter-to-date and our book-to-bill today is at 1.16. However, having said that, our revenue forecast remains flat to slightly up, as Bill said earlier.

As always, I would like to thank our employees for the dedication and hard work. I do sense a positive feeling in the team globally as I travel around the facilities. I would thank our investors for hanging in there, as we work through our performance enhancing actions and our customers for giving us the opportunity to serve. Our mission is to always delight our customers by providing world class product and service.

And this concludes our prepared comments and we’ll be happy to respond to any of your questions. Operator, we are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ana Goshko with Bank of America.

William M. Lowe, Jr.

Hello, Ana.

Ana Goshko – Bank of America Merrill Lynch

Hi, how are you? Thanks very much for taking my question. I wanted to focus on your cash outlook and your level of comfort with your liquidity, and in particular, you drew on the revolver in the quarter $21 million and I wanted to understand the rational for that and you had made some comments, I think, about your cash outlook for FY3Q being a continued cash burn and I just wanted to understand the drivers of that and sort of magnitude potentially?

William M. Lowe, Jr.

Ana, this is Bill. Yes, we drew on the revolver for a couple of reasons; one, we are attempting to keep our total cash in the bank at about $60 million, but if our comfort level standpoint, we are very comfortable with where we are. We still have – looking at the balance sheet, we ended this quarter with inventories of $208 million, another $13 million or so to go in reduction inventories from a cash flow prospective. So what we see is a benefit of the additional margin improvement that occurred this quarter as well as the margin improvement we expect to see again in the December quarter as that starts to work through the cash cycle and the inventories come down and that works through cash cycle, we expect to see the cash come back up. Why is there a little utilization this quarter, it’s the interest expense that I mentioned, we’re going to make that payment tomorrow and then we’ll bring back – cash back up as we enter into the December month from reduced inventories as well as the cash cycle starts to benefit from the increased margins this past quarter.

So we feel comfortable where we are. We feel comfortable that the margins are coming back in the line with what we said, and this is actually, we are repeating a bit what we just the October 1. So it’s a repeat of the same statements. We feel comfortable and the trend that we described 30 days ago is the same trend we described today with no change in that outlook.

This is fair and I think we like to keep our cash above $60 million. We don’t really need that from a running the business perspective, and also as you know, we have access to basically all of our cash at all time. It’s not that’s something sitting at some form of bank account that we can’t touch, that’s not how we run the business. So we are very comfortable with our cash position and we can see the things happening in our inventory balance that’s going in the right direction as we look at the operations this quarter as well as our operating performance improving as well. So we’re very comfortable with our cash position.

Ana Goshko – Bank of America Merrill Lynch

Okay. Thanks very much for that.

Operator

Your next question comes from the line of Sherri Scribner with Deutsche Bank.

Sherri A. Scribner – Deutsche Bank Securities, Inc.

Hi. Thank you. Good morning. I just wanted to get a little detail on where you saw the upside in revenue this quarter? Were there any end markets in particular that were better looked like the tantalum businesses better than expected, but was hoping to get more color?

Per-Olof Loof

I think the – I mean there were kind of all a little better than we had anticipated. Tantalum went up of the $10 million we improved a little over $10 million was in tantalum and the rest was pretty much evenly spread between the other two units. So it was pretty much everywhere we had particularly a good revenue increases in the Americas and we saw some drop in EMEA, which was actually less than we had anticipated.

William M. Lowe, Jr.

Clearly, the summary is always the summary herein and you’d see the drop in August, in particular, but we didn’t – it dropped less than we had anticipated and we – as I said, the book-to-bill right now in EMEA is this 120 and the book-to-bill in the U.S. is 122 and we also saw some very nice increases in both EMS and OEM sales in the quarter. So there are some signs that it’s looking a little better. we always want to caution, because of the December situation, which always is interesting, but if I was sort of ducking the December month, the revenue situation now looks pretty decent.

Sherri A. Scribner – Deutsche Bank Securities, Inc.

Okay, that’s helpful. Thank you. And then just thinking about that 10% operating target going forward, do you have any expectation that you’ll be able to hit that 10% operating – I’m sorry operating margin in fiscal 2015 or do have any timeframe of when you think you might able to reach that? Thanks.

William M. Lowe, Jr.

Yes. We believe we will hit that during the fiscal 2015.

Sherri A. Scribner – Deutsche Bank Securities, Inc.

Great, thank you.

William M. Lowe, Jr.

Thank you.

Operator

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

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.

Thanks. Good morning or good afternoon, guys. Could you give us the margins for the capacitor business; I don’t think we got that yet?

Per-Olof Loof

For the solid capacitor business group?

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.

Yes.

Per-Olof Loof

The margins for that group was 19.1, I think.

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.

Okay.

Per-Olof Loof

19.1

William M. Lowe, Jr.

19.1

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.

Okay. And was most of that improvement from the tantalum side?

Per-Olof Loof

It was – that we had revenue improvements in tantalum and most of it was from tantalum.

William M. Lowe, Jr.

Per gave you a figure that $1 million that came from vertical integration and yield that’s primarily – that’s been the tantalum product line.

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.

Okay. And could you talk about ASPs? AVX was talking about some incremental pressure on commodity capacitors. What are you seeing on the ASP front?

William M. Lowe, Jr.

We did comment on the ASP front on commercial ceramics and yes, we’ve seen continued ASP pressure. we don’t do a whole lot in that space. so it doesn’t really affect us all that much. We saw some in the commercial side of tantalum, polymer, but not as much. So we are seeing some pressures, but maybe it’s because of where our products go that we don’t see it quite as much as some other of our colleagues’ roles.

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.

Okay.

William M. Lowe, Jr.

Some but not huge, and we’re in the negotiation season as we speak. And it’s going, okay so far.

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.

Got you. And as you look to the March quarter, I know with the tantalum vertical integration strategy plus the – some of the manufacturing transitions you should see a continued improvement in operating margin or gross margin in the March quarter. I think you talked to Bill about another 200 basis points or so, and it’s – does that require typical seasonality which is typically up for you in the March quarter. And at that rate it looks like you should be able to get breakeven or at least profitable on an adjusted operating basis by the March quarter, is that right?

William M. Lowe, Jr.

You are well – you’ve understood our business very well Matt.

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.

Okay and what are the – so it seems like finally after three or four quarters things are clicking at least moving in the right direction. What are the things Per that make you worry the most in terms of the challenges that are left either from a macro standpoint or specifically the KEMET?

William M. Lowe, Jr.

On a macro standpoint, clearly we hope that Europe doesn’t slide back. We see some positive signs in Europe even in the southern part of Europe actually and hopefully that doesn’t slide back. We clearly hope that we won’t have another Washington [indiscernible] in January and February. But apart from those, I think on the KEMET side I think we are now well underway in our restructuring activity and that sort of clicking or maybe slightly an aggressive word to use, but pretty much going on schedule and that will happen.

We see the vertical integration activity is happening as we had planned and of course the number of that goes into inventories and we know what will actually come out of that in the following three months. So I think, unless we see something on the macro scene that affects the revenue picture dramatically. We are not counting on the increased revenue much as you’d probably have heard. But if the revenue stays there reasonable and flattish, we should be able to continue our performance enhancing activity as per schedule and as we have discussed over the last couple of quarters.

Matt J. Sheerin – Stifel, Nicolaus & Co., Inc.

Okay, thanks and best of luck.

William M. Lowe, Jr.

Thank you,

Per-Olof Loof

Thank you, Matt.

Operator

Your next question comes from the line of Wamsi Mohan with Bank of America.

Unidentified Analyst

Yes. Hi folks It’s [indiscernible] filling in for Wamsi today. Hey, Per I wanted to start by asking you, if you could just comment on the linearity in this current quarter. Some of the competitors like [indiscernible] talked about some weakness in orders from distribution, but you are pointing to pretty good book-to-bill right now. I think you said 1.16. So could you just comment on like what are you seeing from distribution and some of the other end markets and what’s driving such a high book-to-bill?

Per-Olof Loof

Yes. Actually, if you look at the results of the Q2, [indiscernible] was slightly down quarter-over-quarter not much but just slightly but the OEM and EMS sales were 10% up basically.

William M. Lowe, Jr.

And that has sort of continued in this month of October, so as we now have done a third of the quarter, we are ahead of where we were in Q2 by some number and we are way ahead of what we were a year ago.

So I can see some positive signs that some of our capabilities are being utilized by our customers in increasing numbers which is good to see. So I feel from that prospective pretty good about where we are at. I always worry about the last couple of weeks of December of course which [indiscernible] which is always a little bit hard to ascertain how that will play out. But if I look at it comparative or compared to last quarter if I compared to last year, we’re ahead on both of those counts.

Unidentified Analyst

Okay and Per do you think you’re gaining any share in the market now that you got this partnership with NEC TOKIN do you think, may be on the tantalum are you gaining share?

Per-Olof Loof

I think, there are people who funded that we are gaining some share. It’s a little hard to tell exactly what it seems like we might be gaining some share. I don’t think the partnership actually [indiscernible] will have a top line in fact on either of our two companies, I think, it mainly will affect the margin performance of both operations.

Unidentified Analyst

Okay, thanks. And just wanted to ask Bill you are guiding to a pretty good gross margin improvement, like I think you talked about 16% to 17.5% margins. I was just wondering can you provide a bridge like how much of that is have to need restructuring versus how much is coming from the tantalum side. Any color you can provide on that delta margin [indiscernible]?

William M. Lowe, Jr.

I Alex, we refer you back to a comment that Per made in his former remarks. He said that we were expecting the [indiscernible] we would improve another million dollars. As that the operating line. And so that the balance of your mathematics to get to that increased margin will be in the Solid Capacitor..

Unidentified Analyst

Got it, got it. Okay and the last one from me real quick. Just how much cash do you think you need to run the business?

Per-Olof Loof

Way less than what we have.

William M. Lowe, Jr.

I think – many times people focused on volumes what’s your maintenance CapEx and things like that. The numbers we provided in the past that will be minimums or somewhere amendment [ph] CapEx prospective, you could spend between $5 to $6 million kind of number is fairly small, most of that IT related quite frankly. And then so to bring the cash balance down relatively low down in the 30s because if you look at our DSOs both payables and receivables, they are matched up very nicely. And what we see on a daily, weekly basis is the peak and valley of our cash flows and our cash outflows are very narrow.

So we don’t really have demands any given day or any given week of significant amounts, with the exception of twice a year we make our bondage. So it makes it easier to run the business from a cash prospective and then the last thing I’ll say is Per also mentioned that we have availability to our cash and what he means by that is that about 80 – on any given day somewhere around by 85% of our cash is either A, it’s in a U.S. bank account inside the United States or B, it’s in a parent company bank account in a foreign jurisdiction that’s already of course part of the legal entity as the U.S. company.

Therefore the movement of the cash for us and to – as a part of the United States entity if you will is very easy, we don’t have to worry about is there a withholding tax today? Is there some paperwork we have to file with the monetary authority of the country to move it. So very easy movement of cash and very low fluctuations of peak to valleys on our cash flow.

Per-Olof Loof

And I think – this is Per. What Bill said, we do expect our inventories to come down over the next couple of quarters about $15 million from the end of Q2. We also see the need for additional CapEx to be diminishing we said we do $4, $5 million this quarter that suppose to almost $9 million this last quarter. And there be even less than in Q4 and lot of our – we have spent a lot of money over the last couple of years to get our business restructured and refitted. And that refitting and restructuring activity is nearing completion and the cash I pledge for that is also nearing completion. So as a result of that we would expect cash to start growing in line with the reduction of inventories and in the performance of business.

Unidentified Analyst

Okay. Thank you so much and congrats on the quarter.

Per-Olof Loof

Thank you.

William M. Lowe, Jr.

Thank you.

Operator

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

Marco A. Rodriguez – Stonegate Securities, Inc.

Hi. Thank you for taking my questions. Most of my questions have been asked. Just a couple of quick follow-ups, in regard to the guidance that you’ve provided, I mean it sounds like from your commentary, you’re pretty positive on the environment or at least leaning a little bit more positively, yet the guidance is kind of flat to maybe up 1% sequentially. Are you hearing anything in particular from your customers or not hearing anything from customers as kind of driving that or is it just the strong Q2 that you saw that is kind of driving that?

Per-Olof Loof

I think the forecast that Bill provided is – we’d like to caution, because of the fact that this is the Christmas quarter. And our positive remarks are driven by numbers.

Marco A. Rodriguez – Stonegate Securities, Inc.

Okay, fair enough. and then lastly here, in terms of the cash position, I mean it sounds like you guy obviously have a very good hand on the cash needs for business and I’m just kind of curious to kind of circle back around you from a color perspective, why the need to have such what seems to be excessive cash that $60 million – $50 million, $60 million level?

Per-Olof Loof

Well, we just have said that we’d like to keep it above $60 million and that’s what we’re doing, I mean so it’s to be on the safe side of everything, in case something or some catastrophic nature would happen and we would require to replace the facility or whatnot. So it’s really to ensure that rather safe than sorry.

Marco A. Rodriguez – Stonegate Securities, Inc.

Got it. And then last quick question, just in terms of the kind of cash projects that you’ve talked about last quarter and this quarter where you are talking about cash building back up in the Q4 level. are you still assuming that and is that assuming no more draws from the revolver?

Per-Olof Loof

No. I’m not assuming that additional around the revolver. And as I said, it would just dip somewhat down, assuming that the revolver remains drawn, let’s assume that the current amount today that’s drawn – remains drawn through the fiscal year. We’ll see a little dip and then we’ll see it come back, as I said in our formal remarks, about to the same level that we’ve finished this quarter.

and then again, Per’s comments as we’ve gone through our restructuring programs, capital expenditures will decrease. We expect to continue to build cash as we move into fiscal 2015 on a quarterly basis. So that’s kind of the goal, get back in – after this quarter, get back into that positive cash flow building on a quarter-to-quarter basis.

William M. Lowe, Jr.

Not only, have we moved from expensive locations to less expensive locations. But we have also upgraded our capability dramatically through these resetting/restructuring efforts. So we expect to be running much more efficiently than we have in the past and also a slight comment on the yield situation that I’ve discussed briefly, I think our JV partner is providing excellent support and yield improvements and we’ve seen some very positive moves in that regard, as well as our ability to help them in other areas. So I think the partnership with NEC TOKIN has moved in a more positive direction a little quicker than I actually had hoped for, so that’s also a good sign.

Marco A. Rodriguez – Stonegate Securities, Inc.

Got it, all right. thanks a lot, guys.

Per-Olof Loof

Thank you, Marco.

Operator

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

Hamed Khorsand – BWS Financial, Inc.

Hi, it’s actually Hamed Khorsand. Hi, guys. Just wanted to ask you, with everything has been going on from restructuring standpoint in NEC TOKIN, is it too early to see any new product design wins or anything like that or are we still more in the restructuring kind of phase?

Per-Olof Loof

No, I think we’re seeing product designs coming out – I don’t how much you follow what we are releasing, but we are seeing increasing releases on new products and as I was saying in my prepared remarks, we – clearly, a lot of technical expertise have been deployed and this we’re fitting restructuring effort, that has been going on for several years. And now as that is nearing completion and a lot of their efforts can now be redeployed into what they really should be doing, which is developing new and exciting product capabilities. So I think you will see some interesting moves in the product space as well.

Hamed Khorsand – BWS Financial, Inc.

Okay. And then as for as we look out a couple of quarters from now, I know you’re talking about the gains from all those restructuring from a gross margin standpoint, but how about just from revenues increasing, what kind of capacity you’re running at now that we could see margin expansion later on?

Per-Olof Loof

We can – I mean, if there is additional revenue opportunities, clearly, we will grab those and revenue as somebody said high as many cents right, increasing revenues will of course, have a dramatic effect on our margin performance, but we’re not counting on that. So we’re saying we want to make sure that we have the margins at the right levels at revenues that are essentially flat. But – as I said, I don’t want to spend too much time talking about some of those positive signs that we’re seeing, but I mean if some of those actually do happen as some numbers tend to indicate that would have a positive effect on our profitability performance is what of course.

Hamed Khorsand – BWS Financial, Inc.

Okay. And a last question from me is, as if we see the industry turnaround just from improving standpoint you guys see opportunities for increasing revenue. do you have the cash needs for increased materials and inventory and so forth?

Per-Olof Loof

Yes, we do. We do, we do.

Hamed Khorsand – BWS Financial, Inc.

Okay. All right, great. Thank you.

Per-Olof Loof

Thank you.

Operator

Your next question comes from the line of Gene Fattore with Lazard Capital Markets.

Per-Olof Loof

Hi.

Eugene Julius Fattore – Lazard Capital Markets LLC

Good morning, gentlemen. Thanks for taking my call. I have a few questions that are going to focus upon cash and pro forma, what your needs are. Can you speak to what the most limiting commodities that we have on all of your applications including, perhaps the OEM Advanced, I thought that there was a minimum with a true-up that recorded a minimum $60 million of cash at all times, but perhaps am I correct, could you speak to that number one? Number two, could you tell us pro forma, how many more acquisition payments that are mandatory or due in addition to CapEx and then how much CapEx remaining for the next six and 12 months? Do you need an amendatory basis rather than talking about run rate CapEx of $5 million or $6 million? To give us a better handle on what your needs are and then availability net of this drawdown, because net of the drawdown, if I look at this correctly, you ended with $57 million of cash versus $53 million at the end of the last quarter. So extra drawdown, I think you really burned $17 million, understand a lot of that was for construction needs. so perhaps you can give us a bridge and what we look like going forward just with your cash needs are going to be versus availability? Thank you.

Per-Olof Loof

Okay. On the M&A payment, I feel like we have two more on our Niotan acquisition one in February and one in August, $10 million each and then that’s finished. and then in terms of the construction requirements, we’ve basically finished the building we are in is the last facility that we are going to construct and this is now finished and the remaining cash needs are really to move equipment. So…

Eugene Julius Fattore – Lazard Capital Markets LLC

What you believe those are – do you have a ballpark as to what that will encompass money wise?

Per-Olof Loof

I don’t know exactly, but it’s really, Bill talked about $5 million we need for maintenance CapEx and maybe what we need is another $5 million to $10 million to finalize the rest of the most…

William M. Lowe

Some is on timing of cash flow, some of the – in addition, Per said the equipment moves plus the remaining cash flow that’s, cash payments that are required to our contractors here, even though we had the keys between the total of $5 million to $10 million and I gave you part of that for the next quarter about $5 million and $5 million for the remaining quarter, which you’ll put us around that $28 million to $30 million that I gave you in my formal remarks. Per can talk more about future needs for CapEx in a second as you can address the question. But I do want to – before I turn it back to Per to finish, I want to address one of your questions you talked about covenants.

First of all, on our first is our indentures, our bond indentures, there are no, we could not have any maintenance covenants on our bond indenture or our bank revolver. So we’ve not concerned about on a quarterly basis and EBITDA ratio or some other ratios, we have a debt incurrence test under our indentures that have only come into play, when we wanted to take on more debt excluding the revolver, the revolver was a part of that indenture when we did it. So that’s excluded from that calculation. So I just want to make that point about covenants before turning the call back to Per to talk about future needs of CapEx.

Eugene Julius Fattore – Lazard Capital Markets LLC

Are there any covenants related to the OEM advanced payments or any other arrangements you have like that?

Per-Olof Loof

I’ll try to make this point at the Deutsche Bank Conference on October 1, what counts us cash in the bank, it’s interesting that the U.S. GAAP accounting requires us to keep the $12 million or so that’s left of the OEM’s money itself in other asset category rather than cash although it is cash and it is in the bank. So actually cash in bank if you look at the web slides that we’ve put out today, cash in bank is actually $72.3 million.

So to your point, it is $12 million – $12.3 million above $60 million minimum. So it is defined, it is all cash in bank all the type of liquid assets that count there. So we’re not concerned about that at this point, that’s the bank balance and the bank balance is what counts for the covenants.

Eugene Julius Fattore – Lazard Capital Markets LLC

My question is this, asking about the status of what I believe was the $60 million minimum, was there a covenant along those lines or correct by that OE advanced payment agreement or am I mistaken?

Per-Olof Loof

In the contract, you’re correct, in the contract, it’s not new, it requires the minimum cash balance of $60 million or they have right if they choose to do ask for those funds back, the remaining funds back. But the bank balance is above $60 million.

William M. Lowe, Jr.

Okay. So that covenant, I wouldn’t call it a covenant, but I would call it, it’s part of the contract.

Eugene Julius Fattore – Lazard Capital Markets LLC

Okay.

Per-Olof Loof

But is not coming into play.

William M. Lowe, Jr.

And of course, it’s a sort of a different relationship than where the financial institution as you can well imagine. And in terms of your question on future CapEx, we’ve spent a lot of money on CapEx and as we’ve done in the restructuring effort, there has been a lot of refitting going on as well. So I think the heavy listing in terms of CapEx expenditures, be it for restructuring or refitting purposes or new capabilities as for the majority being done. So I think we’re going to go back to a normal CapEx environment, assuming that the business continues to improve to in the $20 million to $30 million range maximum, and those will be for new capabilities basically.

Eugene Julius Fattore – Lazard Capital Markets LLC

Thank you for taking my questions.

Per-Olof Loof

Sure.

Operator

Your next question comes from the line of Tony Venturino with Federated Investment.

Anthony A. Venturino – Federated Investment Management Co.

Hello. Good morning.

Per-Olof Loof

Good morning.

William M. Lowe, Jr.

Good morning.

Anthony A. Venturino – Federated Investment Management Co.

Just wanted to clarify something, Per, much if I heard this correctly, did you say that Pontecchio would be up by June 15 or did – was that fiscal…

William M. Lowe, Jr.

June 14.

Anthony A. Venturino – Federated Investment Management Co.

June 14.

William M. Lowe, Jr.

I mean, it will be up before, but it will complete – it will be completely finished. I mean, all the stuff will be in here by June of 2014….

Anthony A. Venturino – Federated Investment Management Co.

Okay, maybe…

William M. Lowe, Jr.

… the first quarter of fiscal 2015 for us.

Anthony A. Venturino – Federated Investment Management Co.

All right. Maybe that’s what I heard as fiscal 2015. Okay and then in terms of restructuring you just talked about the cash for CapEx is there any other type of restructuring cash that is going out.

William M. Lowe, Jr.

No, there is a little bit for additional employee cost and these sort of things, but not huge.

Anthony A. Venturino – Federated Investment Management Co.

Okay. Is that – what’s the timing of that, I mean, is that going to be in the…

William M. Lowe, Jr.

Well, it will happen as we move into – as we move into Pontecchio and a little further out as well. So over the next fiscal year, the remaining of this fiscal year and the other fiscal year, those payments will actually go up.

Anthony A. Venturino – Federated Investment Management Co.

And can you give us a ballpark, is it $5 million or less?

William M. Lowe, Jr.

It’s more than $5 million, but it’s less than $10 million.

Anthony A. Venturino – Federated Investment Management Co.

Okay. Okay, great and then so I actually had a question on that $60 million minimum cash balance as well.

William M. Lowe, Jr.

Yeah.

Anthony A. Venturino – Federated Investment Management Co.

You kind of addressed it, but what would be the remedy if that were to be broken, I mean, would that just be a simple kind of renegotiation of terms? I mean, obviously, they want your product and not really the cash, so I mean, what does that…

William M. Lowe, Jr.

There is a couple of things, the rough we provided was $24 million. So basically we – it was the sharing of cost to do this project right, and they provided $24 million. Against that is an LC of $16 million and we have started to pay back and the pay back I believe is in the contract as well.

Well, there is a pay back of 17.5% of last month’s revenue in the contract. So we started paying back in June and we are continuing to pay back on a monthly basis, and the business grows, we’ll pay back more on a monthly basis. So we – and – so we have paid back some of that money already and indeed if – if indeed they decided they wanted the money back and of course this is the first [indiscernible] right and then few millions overlap on top of that, but it’s not something that we are thinking about as a viable and as a real issue here.

Anthony A. Venturino – Federated Investment Management Co.

Sure. So I think you said there was $12 million of that right and of the OEs that was – didn’t you say something about $12 million, could you just clarify that?

Per-Olof Loof

Well, the $12 million is what has not been utilized to-date…

Anthony A. Venturino – Federated Investment Management Co.

Okay.

Per-Olof Loof

For this $24 million that we actually received.

Anthony A. Venturino – Federated Investment Management Co.

So if you were to break that $60 million then...

Per-Olof Loof

Pardon?

Anthony A. Venturino – Federated Investment Management Co.

If you were to break that $60 million cash minimum then that’s what they would claw back essentially?

Per-Olof Loof

I don’t know. I don’t want to put words in their mouth, but…

Anthony A. Venturino – Federated Investment Management Co.

Logistically speaking. I’m just trying to understand the mechanics of it.

Per-Olof Loof

The mechanic – there is no mechanics. I mean, if the mechanics are if, we will – there is a bullet payment at the end of this project, which is the middle of 2015. And what we have used or not used at that point, we will payback with the payments that we are making between now and then, we will take back the balance at the end of that quarter.

William M. Lowe

I think another thing I look at as you look at the contract too, as time goes on as Per talked about the same. We’re currently making payments based upon the production scale and what the contract percentage. As that number passes below the letter of credit, the letter of credit starts to get released as well, which actually then provides more liquidity under the – under our revolver to KEMET.

So it’s all a matter of timing here which is going to occur over the course of the next 12 months or as the payment start to go below the 16 LC, which will start to actually provide more liquidity within the revolver that we probably – we won’t need anyway, but we’ll provide more liquidity base to the company within the revolver as that – as the LC decreases.

Per-Olof Loof

And from an operating perspective clearly we’re in conversations with the OEM on a – maybe not on weekly basis, but our product people and our salespeople on a weekly basis pretty much still, how we – what we should be doing and what we should be investing in and so forth and son on.

Anthony A. Venturino – Federated Investment Management Co.

And how is that the order trends and the revenue trends progress – does that – I think at one point you said maybe it is a little below kind of what you originally thought? How is that progressing recently?

Per-Olof Loof

It’s progressing upwards at that point. It’s probably a little below of what we thought initially, but is progressing upwards for an industry as we speak.

Anthony A. Venturino – Federated Investment Management Co.

Okay. And can you share how much you’ve paid back this quarter?

William M. Lowe

We’re paying back at the rate, it depends on a monthly basis, of course. We’re paying back on a rate between $350,000 and $500,000 a month.

Anthony A. Venturino – Federated Investment Management Co.

Okay. All right. That’s it for me. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Swaraj Chowdhury with Dalton Investments LLC

Swaraj Chowdhury – Dalton Investments LLC

Hi. Can you hear me?

Per-Olof Loof

Yes. Go ahead.

Swaraj Chowdhury – Dalton Investments LLC

Yes. The first question that I had was your joint venture NEC TOKIN, you invested $50 million in – I guess in March quarter. How – can they exercise any good option that compels you to make, fund that investment in that venture and where from you will get that capital?

Also, I would like to know what’s the benefit that you will decide, on what EBITDA multiple you bought that business and what benefit you think will add to by 2015?

Per-Olof Loof

I think this will require a long-term decision. But just briefly, yes, there is – I know, if you read the contract, it’s probably, I don’t know if you read the contract. But there is a put option but, of course, then they will have to provide financing for them. So that’s not something that is a concern to us and we don’t have to – the next tranche we will make whenever we decide is the right time to do it. And there is no presumable requirements to do that. So I think from that perspective, I think it’s a pretty sound, pretty safe investment.

Swaraj Chowdhury – Dalton Investments LLC

Okay and what is the benefit to the company? And what multiple you bought that business?

Per-Olof Loof

Well, I mean, this is a – NEC TOKIN of course is a pretty large business almost, not quite as large as KEMET but pretty close. And it will allow us to reach into a number of different areas than we otherwise couldn’t. And if you think of the fact that they are making inductors, and cores and [indiscernible] and many things, that will be on a board together with ours. So I think our combined – if and when we put the businesses together or even now when we are using – when we are reselling each other’s product, that will give us a much wider range of capability to go after. And if you just think of the fact that we are – they are prevalent in areas we don’t actually serve from a product perspective globally and we are in areas where they don’t serve from a product perspective.

Clearly they are huge in Japan and Asia, and we are nothing in Japan. They are very little in Asia and Europe and the U.S., and we are large in Europe and in U.S. So you can – this is really a combination of two companies which from that perspective it looks very, very good. And we are really happy about our investments so far, we’re very happy with the performance of the unit as we see it. And we can see a clear path to profitability of the JV partnership, as well as the next time periods.

Swaraj Chowdhury – Dalton Investments LLC

Okay. My last question is about your Film & Electrolytic Capacitor division. You don’t have a very powerful market share in this industry segment of the industry. Did you contemplate to sell this division?

Per-Olof Loof

What are you referring, which one? If you take the two, you have [indiscernible] we have a very specialty oriented [indiscernible] business with a small market share.

Swaraj Chowdhury – Dalton Investments LLC

Right.

Per-Olof Loof

But – for all, but we have a decent market share in Europe in the specialty business. We actually have a large market share.

Swaraj Chowdhury – Dalton Investments LLC

Right, but you know I saw that by reading your 10-K, I saw that most of the EBITDA heat had come from that division single-handedly, I mean if that division didn’t exist you will be much, much better off today, that’s what – I mean of course I am not following your industry for a very long time. But if you had after market share why?

Per-Olof Loof

Had you followed us a long time or not? I couldn’t hear that.

Swaraj Chowdhury – Dalton Investments LLC

No, no, no

Per-Olof Loof

No okay, all right.

William M. Lowe, Jr.

It’s actually getting difficult to hear you on your mobile phone. I think you might be in the car. So we are having some difficulty here at this point. It might be more appropriate to take your questions off-line.

Per-Olof Loof

Why don’t you give us a call and we can dive deeper into this, yes.

Swaraj Chowdhury – Dalton Investments LLC

Okay thank you so much.

Per-Olof Loof

Thank you.

William M. Lowe, Jr.

Operator, I think we are about out of time so, I think we need to probably conclude the call at this point.

Operator

Yes sir.

Per-Olof Loof

All right. Well thank you all for listening into us this morning. And we wish you all a great day and thank you for your interest in KEMET.

Operator

Thank you ladies and gentlemen this concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: KEMET's CEO Discusses F2Q 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts