Kemet's CEO Discusses F3Q 2014 Results - Earnings Call Transcript

| About: Kemet Corporation (KEM)

Kemet Corporation (NYSE:KEM)

F3Q 2014 Earnings Conference Call

Jan 30, 2014, 05:00 PM ET

Executives

Richard J. Vatinelle - Investor Relations

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

Hamed Khorsand – BWS Financial, Inc.

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

Marco Rodriguez – Stonegate Securities, Inc.

Scott Russian – Liberty Mutual Group

Wamsi Mohan – Bank of America Merrill Lynch

Owen Douglas - Robert W. Baird & Co.

Anthony Venturino – Federated Investment

Operator

Good morning. My name is Rachel and I will be your conference operator today. At this time, I would like to welcome everyone to the KEMET announces the Third Quarter Fiscal Year 2014 Results. 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. Richard Vatinelle, Director of Investor Relations, you may begin your conference.

Richard J. Vatinelle

Thank you, Rachel. Good morning and welcome to KEMET’s conference call to discuss the financial results for our third quarter of fiscal year 2014. Joining me on the call today is Per Loof, our Chief Executive Officer and Bill Lowe, Executive Vice President and CFO. We are speaking with you today from our headquarters in Simpsonville, South Carolina. As a reminder to you, a presentation is available on our website that should help you follow along with the financial portion of our presentation.

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

Now I will turn the call over to Per.

Per-Olof Loof

Thank you, Richard and good morning everyone. We are pleased to report to you today that on a non-GAAP basis we earned $0.02 per basic and diluted share. Our continued focus on improving our cost structure and efforts to vertically integrate our material supply chain of tantalum powder have turned the corner.

We saw a better mix of specialty products and a nice increase in our OEM business while even though total revenue including discontinued operations was down just slightly. Our non-GAAP gross margin increased from 15.4% to 18.5%.

Our partner NEC TOKIN also turned in a better performance helped to some extent by exchange gains while share of the financial result rose from a negative 1.2 million in Q2 to a positive 1.7 million this quarter.

We continue to face challenges with revenues continuing to remain persistently flat. I am therefore particularly pleased that we have been able to improve our performance around 6 million compared to Q2 by bringing costs down. We are in the final phase of resetting our F&E business and this quarter represents a major push as we are basically continuing to transfer our equipment to new facility in particular in Italy.

We have 12% of our F&E lines out of commission this entire quarter. Even as we wind up this program over the next few quarters we have more opportunities to implement in fiscal ‘15. And that is not counting revenue upsides that we several of our businesses as well as THE synergy effect that we will benefit from as we work closer with our joint venture investment NEC TOKIN.

We have built buffer stock in advance of this major move of course and it has added to inventory. In addition, in our tantalum business we have had to in some cases double up on raw material inventory. We will complete the move this quarter and our tantalum supply chain is maturing quickly but we should see inventory come down significantly. We expect that this asset will begin to bear fruit as we begin our next fiscal year in April.

I will speak more to you about our outlook after Bill goes through the numbers for the quarter. Bill?

William M. Lowe, Jr.

Thank you Per and good morning everyone. I will begin my review on slide four if you are following along on the slide deck that is on the website. And as a reminder the results included in this presentation have been adjusted to reflect discontinued operations as the Film and Electrolytic business group has initiated a plan to dispose off this machinery unit.

Net sales of $207.3 million were down 0.5% compared to the prior quarter of September 30th of $208.4 million that’s up 4.9% compared to net sales of $197.7 million at the quarter ended December 31, 2012. Our non-GAAP gross margin as a percentage of sales increased 3.1% to 18.5% compared to 15.4% in the prior quarter and our non-GAAP net income was $0.02 per basic and diluted share. Adjusted EBITDA for the quarter was 23.2 million up from 17.8 million for the prior quarter ended September 30th. And referring back to slide three, our GAAP loss for the quarter was $0.13 per basic and diluted share.

Turning now to slide six, our adjusted non-GAAP SG&A expenses were 20.8 million down from our forecasted SG&A slightly for the quarter but essentially flat from the prior quarter of 20.7.

On slide seven, the total capital expenditures during the quarter were 6.7 million. We expect our capital expenditures for the fourth fiscal quarter ending this March to be in the range of another 6 million to 7 million and for the entire fiscal year they are reported to be in the range of 30 million to 32 million.

Cash in the bank at December 31st was 69.6 million which was down just slightly from the prior quarter and better than we forecasted.

I would like to conclude my comments with a few remarks about NEC TOKIN’s financial performance. And as Per said earlier, we continue to be pleased with the progress of NEC TOKIN. Revenue in Q3 came in at $129.6 million down 4.1% over the $135.1 million of revenue in the second quarter. However, EBITDA for the quarter was $12.9 million which was exactly the same as last quarter’s $12.9 million and our share of their net income was $1.7 million on a U.S GAAP basis, their cash balance increased and remains healthy at $109 million.

Now, I’ll turn the call back over to Per to discuss a few of the markets in our business units. 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 $51.3 million in Q3 from $50.7 million in Q2 or 1.2%. Margin improved by $1 million in Q3, compared to Q2. Q3 operating performance relative to Q1 represents an annualized improvement of $20 million.

While we are not where we need and want to be yet, we have a solid plan in place and we are right on track. As I said earlier the final steps for restructuring during this fourth quarter will begin to have an impact next fiscal year in the June quarter. Reaching a conclusion to this process has allowed us to put our staff back to work on developing product and making headway again in our film business creating new products for our customers.

A few comments now about the solid capacitor group. Revenue was down 1.6 million or approximately 1% versus Q2. However, margin improved by $5.2 million or 18% quarter-over-quarter. Mix played a role as we continued to rationalize lower margin business and drive growth in our higher margin specialty product lines. Our specialty business continues to improve and we expect further gains in the quarters to come.

In addition, the manufacturing costs continue to improve with key contributions in the quarter from vertical integration and yield initiatives; overall a very solid quarter for this group.

In the ceramic product line, Q3 revenue was at $58.4 million, up 1.6% from Q2. Strong OEM revenue from automotive, defense and aerospace and distribution offset softness in EMS. Our tantalum product line was down $2.5 million in Q3 to $97.7 million.

Regarding sales by region, Q3 revenue in the Americas finished up 4.1% at $68.1 million compared to Q2, driven by strong demand from our automotive, medical and industrial segments. In EMEA, revenue decreased slightly from Q2 to $67.8 million as the Christmas slowdown was more significant in this year than previously mainly actually driven by how the calendar turned out. Many customers basically shutdown for up to two weeks. However, our distribution POS sales are holding up well. Going forward, we expect to see demand improvement from our industrial and automotive segments. Book-to-bill in Europe and the U.S are particularly strong and I am cautiously optimistic about both the U.S and Europe.

In the Asia Pacific region, sales closed at $71.5 million, down 4.4% over Q2 driven by a decline in the EMS business segment and soft notebook demand. During the quarter operating income was trending up and distribution POS increased 10%. Going forward the automotive segment is expected to grow in calendar '14 and the Chinese Government will be releasing a new stimulus in the industrial segment. This coming quarter in Asia will present further challenges of course due to the slowdown we expect during the Chinese New Year celebrations.

I’d just like to add a few comments about our automotive segment which is 22% of our business. At the recent Consumer Electronic and Detroit Auto Shows there has been a huge emphasis on driverless cars in the automobile as the ultimate mobile device. We believe that KEMET is uniquely positioned to take advantage of this potential growth. We plan to focus on automotive and specialty products to drive growth and bottom-line in the quarters ahead.

Now turning to our forecast for our fourth and final quarter for the fiscal year. Earlier I said the revenue remains a challenge, so we expect to see a very similar picture to the quarter we just completed. The macro picture in the U.S and Europe is encouraging but will that show up an increase sales for us is not totally clear but it certainly feels a lot better. So if I were to be a bit conservative I'd have to project essentially flat revenues with margins a little under pressure from a changing mix. Having said that, the book-to-bill rate today sits at 1.36 after a-third of the quarter. Yes, maybe customers have ordered early but ship freights are commensurate or actually a little up from Q2. And it seems the semiconductor shipments picked up in Q3 and POS are signaling positive gains in January.

Yes, we have typically a somewhat less healthy product mix in Q4 but orders have come in showing a good mix. What I am trying to say is that logic would say that, that margin should be under some pressure in Q4 and we are not helped by the fact that we cannot produce in Italy only ship from -- however the early signs are rather positive. As I alluded to earlier we are encouraged by the performance of NEC TOKIN, performing better than forecast across-the-board. If we were to combine the revenue and EBITDA of the two organizations it tops $330 million in revenue with EBITDA at $36 million for the quarter with plenty of upside to come from synergy activities.

As always thanks to our hardworking employees that continue to make the extra effort to improve our performance and enhance our customers experience. And this concludes our prepared comments and we will be happy to respond to any of your questions.

Question-and-Answer Session

Operator

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

William M. Lowe, Jr.

Hello, Ana. Good morning.

Ana Goshko – Bank of America Merrill Lynch

Hi, there and thanks very much. So Per and Bill on the comments on the outlook with conservatively flattish EBITDA but margins under pressure due to mix. So you don't see any sort of offsetting margin benefit from the continued restructuring activities that could either keep margin flat or provide a kind of positive benefit?

Per-Olof Loof

I was trying to sort of -- typically if you go back in history, yes it is a different mix in this quarter but we are seeing continued improvements from our vertical integration I think it is going to be a couple of million dollars relative to what it was this quarter. So we see offsetting cost improvements coming in this quarter that could offset some of the margins and the quarter had started well.

Ana Goshko – Bank of America Merrill Lynch

Okay. And then can I ask you for an OpEx outlook also for coming quarter?

Per-Olof Loof

OpEx is going to be pretty similar to what we have now.

Ana Goshko – Bank of America Merrill Lynch

Okay, so you are saying pretty flat.

Per-Olof Loof

Yes.

Ana Goshko – Bank of America Merrill Lynch

And then finally the all-important question of cash outlook. In the past you had said that you believe that cash could increase in FY 4Q wondering is that still intact?

Per-Olof Loof

Yeah we still believe it is going to happen, yeah.

Ana Goshko – Bank of America Merrill Lynch

Okay.

Per-Olof Loof

Going out to Q3 was actually little better than we had forecasted. I think we said and we still say the same thing that we expect ending the year about where we ended September so it dropped a little bit this quarter we said going backup to about where we were in September.

Ana Goshko – Bank of America Merrill Lynch

Okay, great. Thanks very much.

Per-Olof Loof

Thank you Ana.

Operator

Your next question is from the line of Hamed Khorsand, BWS Financial.

Hamed Khorsand – BWS Financial, Inc.

Hi, good morning I was just wondering as far as the product mix goes, is there any kind of outlook as far as margin pressures if automotive becomes a bigger stake or if we get more erosion in the computer space, could you just talk about the pricing outlook please?

William M. Lowe, Jr.

Yeah I think the pricing; we've seen some pricing pressure in this quarter in the computer segment particularly I would say. And in automotive I think we are not seeing that and we are focusing in, in automotive on the specialty area which tends to have healthier margins and we have seen our specialty product line doing really well in this last quarter and going to do even better in fiscal fourth quarter. So I believe that we are seeing actually from the way this is trending that we are actually try to do less in the segments where we make less and do more and where we actually believe we have a better performance and customers are willing to pay a little more.

Hamed Khorsand – BWS Financial, Inc.

Okay. And then the other part was from an early comment about F&E and being out of commission in the quarter what kind of impact does that have on revenue?

Per-Olof Loof

I mean if we have built the right buffer stock it shouldn't have any impact on revenue. So we've built for these lines that are out of commission this quarter. Actually we're moving over 500 pieces of equipment this quarter, so it's quite a major-major effort. But we have built buffer stock to cover that and assuming that we bet on the right product it should have no impact.

Hamed Khorsand – BWS Financial, Inc.

Okay. And then my last question is just purely on the vertical integration, is there a lot more margin you can squeeze out of operations or have we seen most of it?

Per-Olof Loof

No, what I said also in my prepared remarks is that we're basically saying that many of our restructuring efforts are going to be finished over the next couple of quarters. But there’s a number of activities going into fiscal '15 that we actually will improve the operating performance as well. So it doesn't finish now there is more to come and it's not insignificant.

And I think as I said we believe 1 million or 2 million additional opportunities in quarter four here in the fiscal. And then additionally may be another couple of million dollars from vertical integration in fiscal '15. So it's not finished yet we are around let's call it 70% of our tantalum supply now comes from our own efforts.

Our objective is to get to 80. And what we are doing now is we are qualifying expensive powders that we are making ourselves in our product lines and it takes a while to do the final push there but as those qualifications are finalized we will see additional improvements in our cost structure.

Hamed Khorsand – BWS Financial, Inc.

Okay. And this is purely with revenue being flat correct?

Per-Olof Loof

This is purely with revenue being flat, yes.

Hamed Khorsand – BWS Financial, Inc.

Okay, great. Thank you very much.

Per-Olof Loof

Okay. Thank you.

Operator

Our next question is Matt Sheerin with Stifel.

Per-Olof Loof

Good morning Matt.

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

A few questions for me, on the sale of that machining business, could you tell us the profitability I think you are losing money there and does that have anything to do with the, or was that part of that significant gross margin expansion that you saw in the quarter?

Per-Olof Loof

Matt we actually, when you compare the two quarters the number we provided externally. We have taken the machining out of both the quarters so it's comparable apples-to-apples from an improvement standpoint. And then you should have to go back and compare what we have reported last quarter which included machining to see what we taken out the numbers.

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

Okay. But it did have a positive impact though?

William M. Lowe, Jr.

It did have a positive impact but the quarter-to-quarter improvement has been taken out. So

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

Understood. Okay. And so is it improving you got a quarter ago in other words?

William M. Lowe, Jr.

Well we had similar operating income impact quarter-to-quarter on the machining business not significantly different.

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

Okay. And could you tell us, I am not sure you gave the gross margin or operating margin number for the two key segments, the Capacitor and F&E?

William M. Lowe, Jr.

We did not and what we have provided in the deck allows you to calculate it on a non-operating income basis versus sales since we don't report that in our Q.

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

You mean by segment percentage basis?

William M. Lowe, Jr.

Segment non-operating income if you look in the deck, we gave you the sales which we give in the Q we make sure we have given it on our web slides now as well so you can do that math between sales and adjusted non-operating income for each segment.

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

Okay. And in terms of that operating margin guide which is flat to down a little bit it sounds like and I think you said you are on about $20 million annual savings rate coming out of last quarter. It sounds like the net incremental step-up will come in the June quarter and can you quantify that on a dollar basis what we should start to be looking at in June and September quarters?

Per-Olof Loof

I think we -- Matt this is Per; we have in the past talked about what the total savings should be and I think we have another $4 million, $5 million to go on an annualized basis.

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

$4 to $5 million a quarter?

Per-Olof Loof

At least, not a quarter but $4 to $5 million in the F&E business which is what John alluded to on an annualized basis.

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

And then Per what about with the tantalum expansion, what's the run rate there incrementally?

Per-Olof Loof

The run rate there is about 2 million a quarter maybe another couple million over the next two quarters after that.

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

Okay. So it sounds like there is definitely some margin expansion, but beyond that what's going to really margins or volumes right?

Per-Olof Loof

No, volume is going to help, but there are six other programs which will kick in over the next two quarters which will help for the margin expansion as well. So even though what is going to finish now is the major moves. No more plans are being built, very little equipment is being shipped but there are other things that we can do after the equipment is shipped to allow us to further expand margins. So I am pretty optimistic about our ability to continue to expand margins through cost improvements.

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

Okay.

Per-Olof Loof

Clearly as the volume picks up and there are some signs that volume will pick, so if that happens that of course will be better.

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

Okay, great alright. Thanks. We will see you in a couple of weeks.

Per-Olof Loof

Okay. Thanks Matt.

Operator

Our next question is from the line of Marco Rodriguez, Stonegate Securities.

Marco Rodriguez – Stonegate Securities, Inc.

Good morning guys. Thanks for taking the questions. Wanted to kind of circle back around in terms of the divesture there in the F&E business, is there any sort of additional color that you can provide as far as how we should be thinking about the trajectory of the gross margin in that particular business?

Per-Olof Loof

In the F&E business you mean going forward?

Marco Rodriguez – Stonegate Securities, Inc.

Correct, correct.

Per-Olof Loof

We are on a trajectory to improve the gross margin in that business and that's happening and this business has been looked at for a while and we decide it to dispose of it and that and the works. It's not really core to what we do, it's something we kind of picked up because we knew how to do and we think that it is better housed by somebody who is focused in on machining activities, but you can expect F&E to continue to improve quarter-over-quarter.

Marco Rodriguez – Stonegate Securities, Inc.

Is there some sort of a run rate or a target as far as the gross margin is concerned in the F&E business that you are targeting or you are looking at?

Per-Olof Loof

Yeah I mean we are looking to be able to move our gross margin needle more towards what we are doing in the other businesses and we think we will be able to do that once we finalize all of the moves.

Marco Rodriguez – Stonegate Securities, Inc.

Got it. Okay.

Per-Olof Loof

We are right on where we thought we were going to be actually.

Marco Rodriguez – Stonegate Securities, Inc.

Okay. I am sorry I am not sure if I caught this but did you provide the gross margins by segment?

Per-Olof Loof

We did not we provided you with the sales number and adjusted operating income in the slide deck that’s calculated at the operating income level not the gross margin. There’s not that much different but that falls below the gross margin and operating income for the business unit little bit of their own negative SG&A and their R&D but we provided what we provide in the Q in the web slides.

Marco Rodriguez – Stonegate Securities.

Okay. So you guys are not going to be providing that information going forward?

Per-Olof Loof

No.

Marco Rodriguez – Stonegate Securities.

Okay. And then in terms of the NEC TOKIN products that you've integrated now into your own offerings, can you talk a little bit of the training efforts that are being made with your sales team?

William M. Lowe, Jr.

Yeah there is we have started to equip our distribution partners with these products with stocking packages. And it was interesting one of our distributors the usual, refer those catalogue distributors there is no real catalogues anymore. But anyway they reported the day that they announced this that they had about 3,000 hits on that slide that day. So I think there is a lot of interest in the capability that we can provide. And that's going to start slow of course but as these products get designed in and we get print position I think you can see some nice growth in that business as we move forward.

Marco Rodriguez – Stonegate Securities.

And when do you expect that to be kind of in full swing if you will in really impacting now your revenue line?

William M. Lowe, Jr.

Well there is going to be, it's going to come -- there is a little bit impacting this quarter that we are in now. And then you're going to see that impacting more and more. It's a little difficult to really put a number at this, this will happen but I would imagine that could be in the next over the next year it won't be insignificant.

Marco Rodriguez – Stonegate Securities.

Okay. And then in your prepared remarks you talked about additional cost saving measures in fiscal '15 could you provide may be a little bit more color as far as what sort of projects or what sort of ideas you are looking at there?

William M. Lowe, Jr.

Well it's basically in a way it's taken as we have made these moves, there are further actions we can take to solidify that. And there is a bit of lag as to when some of these actions can be taken relative to further restructuring efforts. So we have to wait for the moves to happen and then these can step in. But we haven't provided a number. But it is not insignificant number that we can see that we will implement in the first two quarters of fiscal '15.

Marco Rodriguez – Stonegate Securities.

Were these moves, I am sorry just one quick follow-up; will these moves be followed with restructuring charges or anything like that nature?

William M. Lowe, Jr.

There will be some restructuring charges as a result of that yes.

William M. Lowe, Jr.

When we get into the next call in March we’ll have -- we may be able to quantify things that are presented as we determine whether or not it will happen in those quarters or not.

Marco Rodriguez – Stonegate Securities.

Okay. Alright great. Thanks a lot guys.

William M. Lowe, Jr.

Thank you.

Operator

Your next question is from the line of Scott Russian with Liberty.

Scott Russian – Liberty Mutual Group

Hi, good morning. Most of my questions have been answered but just a quick one I am just trying to reconcile the debt balance, could you just let me know how much you have drawn on the revolver and then how much is on the balance sheet in terms of that liability related to the one customer CapEx project? Thanks.

William M. Lowe, Jr.

There is the same number withdrawn on the revolver which has original draw which is $21 million on revolver, most of that I believe sits in short-term that since the revolver period goes through September. The amount remaining on for the OEM contracts is approximately $15 million.

Scott Russian – Liberty Mutual Group

Okay. That was all I had thanks guys.

William M. Lowe, Jr.

Okay. Thanks.

Operator

Your next question is from the line of Wamsi Mohan, Bank of America.

Wamsi Mohan – Bank of America Merrill Lynch

Hi, thanks good morning guys. Can you provide may be some detail on the plan to dispose the machinery, what sort of timing are we looking at I know you have put in discontinued ops here and any payment that you would get from it?

William M. Lowe, Jr.

Well we haven't discussed the payment and I think we will but it's pretty short-term actually. So we expect this to happen over the next couple of months.

Wamsi Mohan – Bank of America Merrill Lynch

And Per I think previously as you were going through that F&E restructuring at some point and correct me if I am wrong here but I thought that the whole F&E portfolio could be sold if it didn't sort of hit the profitability criteria that you talked was appropriate. And I am just wondering as this restructuring is progressing and you are showing this margin improvement here, how do you feel about the broader portfolio in F&E?

Per-Olof Loof

What we have done to-date, what’s going to happen this quarter and what's going to happen over the next two quarters are sort of beyond the announced program I feel pretty good about where this business is heading, really good actually. So we tend to minimize this, but of course we've had a lot of our engineering resources that kept focusing on the restructuring efforts and the moves and so forth and of course these moves now are basically finished we can redirect those resources to work on customer issues rather than moving things around. That coupled with what I know is going to hit this quarter and what I know is going to hit in June and what I know is going to hit in the September quarter I feel pretty good about the F&E business actually.

Wamsi Mohan – Bank of America Merrill Lynch

And can you just talk about the NEC TOKIN business. Just in terms of the revenue there, how much did that sort of improve sequentially?

Per-Olof Loof

Well the revenue was a little down in Q3 over Q2 about $5 million if I remember correctly. However, the EBITDA performance was flat. So we've seen that group actually improve its performance quarter-over-quarter from a cost perspective and there is more to do and the synergy effects that we can see from combining activities will help both organizations.

So again there is a great opportunity with NEC TOKIN, I think people haven't really understood what this can do for both of our companies as we move this thing forward and eventually when we will move the two things together that will have even a greater effect. So I think from a company perspective this opportunity that the partnership actually represents is not insignificant for our organization.

And it will broaden our portfolio, and it will broaden our portfolio in segments where the specialty products are more prevalent and where there are long designing cycles but also that means that the products will stay in production for a long time. So I think as we look forward the stuff we are doing in F&E and what we are doing with vertical integration and the tantalum business as well as specialty focus in ceramics and the NEC TOKIN capability I think you will see a very different KEMET in a few years down the road.

Wamsi Mohan – Bank of America Merrill Lynch

Thanks for the color Per. One more question on NEC TOKIN. Can you give us any sense on where the gross margin of that portfolio is tracking?

Per-Olof Loof

No, I don't think we are providing that data.

Wamsi Mohan – Bank of America Merrill Lynch

Yes, thank you. And Bill is the inventory level still the target to hit like 195 by the end of the quarter?

William M. Lowe, Jr.

That's correct.

Wamsi Mohan – Bank of America Merrill Lynch

All right, thank you very much guys.

Per-Olof Loof

Thank you Wamsi.

Operator

(Operator Instructions) Your next question is from the line of Owen Douglas with Robert. W. Baird.

Per-Olof Loof

Good morning.

Operator

Owen your line is open.

Owen Douglas - Robert W. Baird & Co.

Hi, good morning guys. Just a quick question, by the way thanks for taking my call; wanted to ask about the CapEx I know that you guys have been watching your cash spend on that a bit. So with divestiture of the machinery business, what does that do to your forecast in terms of how you think about your CapEx in the next couple of quarters to a year or two out?

William M. Lowe, Jr.

It won't affect our CapEx at all actually.

Owen Douglas - Robert W. Baird & Co.

Okay. So for fiscal 2014, what sort of a number are you thinking I think that you guys did about $25 million year-to-date?

Per-Olof Loof

Yeah I think we are in the $20 million to $25 million range for the next fiscal, it is down $12 million to $13 million kind of from this year to next year.

Owen Douglas - Robert W. Baird & Co.

Okay. And should we look at that as sort of a maintenance steady state number or…?

Per-Olof Loof

There is no maintenance; these are actually investments in our ceramic business and in our F&E business to add capability to product lines that are basically sold out.

William M. Lowe, Jr.

I think many a times we get asked that question on maintenance cap is fairly low here. So if you take a look at it an average year somewhere in the $5 million to $6 million range will be, you might get to classify that but to Per’s point most of, if not all of what we will be spending next fiscal year would not be classified as probably as maintenance.

Owen Douglas - Robert W. Baird & Co.

Okay. Those are going to be investments that actually yield greater top-line growth?

Per-Olof Loof

Absolutely yeah.

Owen Douglas - Robert W. Baird & Co.

Okay. And in terms of the breakdown in tantalum and ceramics, in the past you guys have sort of guided us a little bit there, how was the tantalum business done sequentially?

Per-Olof Loof

Sequentially it was down 2.5 million on a revenue basis, but the effort on the cost side is very positive. I think if I can call your attention in the slide 10 in the slide deck there is a summary for this capacitor group between September and December quarter both revenue and adjusted operating income. It's about 5.3 million or so cost improvements quarter-over-quarter if I remember correctly.

Owen Douglas - Robert W. Baird & Co.

Okay. So you are saying that the revenue for tantalum is down about 2.5 but the cost improvements helped to save the day there right?

Per-Olof Loof

Right. Absolutely right.

Owen Douglas - Robert W. Baird & Co.

Okay that's great. And in terms of you sort of in terms of how that business is shaping up in the top-line, how is that looking for this Q4, I understand it is a bit soft quarter?

Per-Olof Loof

Yeah it is soft but after a third of the quarter book-to-bill is 136 and our ship rates are higher than Q2. So that's just a data point as we are looking at the business today.

Owen Douglas - Robert W. Baird & Co.

Okay. Great. Well thank you very much guys and this is a good result.

Per-Olof Loof

Thank you.

Operator

Your next question is from the line of Tony Venturino, Federated Investment.

Anthony Venturino – Federated Investment

Hi good morning guys.

Per-Olof Loof

Good morning.

Anthony Venturino – Federated Investment

Just a handful kind of follow-up questions here. In terms of the machinery business, are you in discussion to sell that or where are you in terms of that process?

Per-Olof Loof

Of course we are.

Anthony Venturino – Federated Investment

Okay. So you should be announcing something let’s say in the next couple of months?

Per-Olof Loof

Yeah.

Anthony Venturino – Federated Investment

Okay. And then the specialty products, can you remind us of how big that is as a percent in total?

Per-Olof Loof

There are different sizes I don’t think we have given, have we give specialty information specific to…?

Anthony Venturino – Federated Investment

I saw in the past you had given maybe like a number of percentage or total or….

Per-Olof Loof

We have given although it's by business not by segment. By segment, if you look at the surrounding business, it's a major portion; it's a big portion of that group and if I take the solid capacitor group in total it's probably in the -- on an annualized basis and the $150 dollar range for the solid capacitors.

Anthony Venturino – Federated Investment

In F&E?

Per-Olof Loof

It's about a fourth of the business in total and growing as a way we define.

William M. Lowe, Jr.

As we defined it always has a little bit of definition of what they classify as specialty.

Anthony Venturino – Federated Investment

Okay. Thank you. That's helpful. And then I missed in the prepared remarks I think Per you were talking about different regions and you are talking about POS activity in AP. Could you repeat that for me?

Per-Olof Loof

Well I said that the POS and AP was actually trending up 10% is what I said.

Anthony Venturino – Federated Investment

Okay. And then how about book-to-bill by segment I mean you have given those in the past, you said U.S. that's more geographic but could you give us book-to-bill by segment?

Per-Olof Loof

We decided not to give that out today what I wanted to show you is that book-to-bill is very high 136. It's about if I would have -- in the September discussion and actually in the late October book-to-bill was like in the 1.2 range. So book-to-bill is not higher as it was in October and also shipments are below the higher end in January than they were in October and the majority of those is happening in the Europe and in U.S. which from a margin perspective is of course a good thing. So the book-to-bill in Europe and the U.S. are very healthy.

Anthony Venturino – Federated Investment

Okay. And then last one kind of the higher level Per you also talked about the auto opportunity with the driverless car. Could you give us maybe a little more color on the timing of that when you expect maybe that to hit, is that a fiscal ' 15 or ' 16 event and maybe kind of the size of the incremental opportunity?

Per-Olof Loof

If you go back a few years, our automotive segment was about 18% of our business, now it represents 22 and is improving and increasing every quarter. And the driverless car is just one thing that I think we're all looking at was some amazement and when that will hit we will be part of that picture. But it is not a fiscal '15 activity I would think from our perspective. But I think there are interesting things happening in the automotive segment and we are pleased that we have, we are qualified for automotive across-the-board and are able to participate in increasing numbers in that business.

Anthony Venturino – Federated Investment

So is it fair to say that this potentially is incremental so that 22% could even grow from there?

Per-Olof Loof

Could even grow from there absolutely.

Anthony Venturino – Federated Investment

Okay all right. Thank you.

Operator

(Operator Instructions) Your next question is from the line of Owen Douglas, Robert W. Baird.

Owen Douglas - Robert W. Baird & Co.

Hi, guys sorry just a one quick follow-up as well. So just thinking about this run rate you guys to do about $100 million in EBITDA and you said CapEx using the number of 30 million as sort of CapEx number. So on that basis it kind of seems to me that you guys are really doing a lot better than your sort of current debt price should indicate. How are you guys thinking about that because I think they become callable in May is that correct?

Per-Olof Loof

That's correct.

Owen Douglas - Robert W. Baird & Co.

So how do you sort of view the puts and takes on that, you do have another four years maturity on that which some might look at being positioned but in terms of thinking about what it is you would like to see in a debt security, sort of the puts and takes there in terms of security versus land versus coupon payments just help me understand that a bit better.

Per-Olof Loof

First of all I think the CapEx is going to be less than 30. So it's between 20 and 25 may be closer to 20 to 25 actually. Bill you want to comment on that?

William M. Lowe, Jr.

I think we've said a couple of times I think as we've done some presentations that we are virtually very aware that the call period ends in May and we will fairly soon be in the process of looking at it on a holistic basis that you said to determine is it something we're satisfied with or that remaining four year period is something we need to look at depending on what the capital markets look like this summer, how is our performance progressing as to whether or not is something we need to revisit. Back when we raised this capital in May of 2010 the markets looked completely different than they do today and we have may decide whether we make a change or whether we go forward with what we have. So I think that was a little early yet to say but certainly it is on our radar screen now absolutely.

Owen Douglas - Robert W. Baird & Co.

Okay. But as you think about that are you looking to possibly raise new capital or it will be a similar size facility as you think about this?

Per-Olof Loof

I don't think we can see yet.

Owen Douglas - Robert W. Baird & Co.

Okay. Thank you very much guys appreciate it.

Operator

We have no other questions at this time.

Per-Olof Loof

Okay. Well thank you very much for joining us this morning and we wish you good day. It actually is still pretty cold in South Carolina but hopefully it's going to warm up over the next couple of days. So stay safe and make sure you drive safely as you move towards regions where there is a lot of ice and snow. So anyway thank you very much and have a great day. Thank you.

Operator

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

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