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

KEMET Corporation (NYSE:KEM)

F4Q10 Earnings Call

May 20, 2010 9:00 am ET

Executives

Dean Dimke – Director, Corporate and Investor Communications

Per Loof – CEO

Bill Lowe – EVP and CFO

Analysts

Anna [Gosky] – No Company Identified

Omar [Samulad] – No Company Identified

[O.S. Hamad] – No Company Identified

[Ram Vemeri] – No Company Identified

Bryan [Reubens] – Mitsubishi Securities

Operator

Welcome everyone to the KEMET fourth quarter earnings conference call. (Operator instructions) Thank you. Mr. Dean Dimke you may begin your conference.

Dean Dimke

Thank you. This is Dean Dimke, Director of Corporate and Investor Communications. Good morning and welcome to KEMET's conference call to discuss our fourth quarter financial results ended March 31 for fiscal year 2010. On the call with me today is Per Loof, our Chief Executive Officer and Bill Lowe, our Executive Vice President and CFO.

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

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

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

Per Loof

Thank you, Dean and good morning everyone. What a difference a year makes. The fourth quarter ending on March 31, 2010 continued to build on the positive momentum from previous quarters. I am very pleased to report we once again turned a profit.

We posted a non-GAAP adjusted net income of $8.8 million or $0.11 per basic share and $0.06 per diluted share for the quarter. Adjusted EBITDA for the current quarter was $25.4 million versus the company’s recent forecast of $22-25 million. Our strong focus on cost containment, manufacturing efficiencies and inventory management continues to pay margin dividends for us. Gross margin as a percent of sales for this past quarter increased to 20.2% compared to 18.2% for the third fiscal quarter of 2010.

This past fiscal year began for us like for many companies with us facing some real and very serious challenges. Three years ago we were about to start to integrate and rationalize our two new companies we just had acquired but the worldwide recession had other ideas and put a stop to our efforts. We simply had to postpone. Other areas became more important and our efforts moved to implementing strategies that have been focused on strengthening the balance sheet, preserving and building cash, increasing margins, reducing costs and returning to profitability.

For the next few minutes I would like to highlight what we have been through and what we have been able to accomplish over this past year. In May of 2009 we announced a strategic relationship with Platinum Equity. Platinum committed credit facilities which included a term loan and a working capital line to enable us to reduce debt and add additional liquidity to the business. We used proceeds from Platinum’s facilities to tender 54% of our outstanding convertible notes at 40% of par and for working capital purposes resulting in a total draw of $57.8 million. The relationship with Platinum Equity has proven to be extremely valuable for our business.

During the past year we have reduced our debt by $51.5 million while at the same time building the unrestricted cash by $40 million to $79 million from $39 million a year ago. About a month ago in April we launched a new bond offering that was finalized and funded on Wednesday, May 5, 2010. This represents a significant step towards strengthening our balance sheet. We now have in place the new 10.5% senior notes in the principle amount of $230 million which will mature on May 1, 2018.

The structure of this new indebtedness is such that there are no interim principle payments. The principle balance is due at maturity. During the term of this loan we will be making semi-annual interest payments which will begin in November of this year. This new debt eliminates all of our prior mid-term maturities and actually increases cash flow by a serious number compared to our old combined principle and interest payments.

The proceeds from these new bonds have now also been used to prepay all the debt previously owed to Platinum Equity, UniCredit Corporate Banking and Vishay Intertechnology. We also used proceeds from the bonds for the redemption of a portion of our convertible notes at a discount to par. We announced this week on Tuesday the successful closing of this tender for $40.5 million of face value of those notes.

The new note represents an important enhancement to our debt portion of our capital structure for a number of reasons. First, the future significant refinancing requirements which would have arisen as the debt with Platinum, UniCredit and Vishay matured over the next three years has now been addressed. Second, the new bond does not carry quarterly maintenance covenants as our previous debt instruments did, thereby giving us additional degrees of freedom with much greater operational flexibility going forward. Third, the extension of the principle maturity date to 2018 will in effect result in a net positive cash flow for us.

The notes represent a major milestone in our financial evolution. This past year we retained 100% of KEMET’s top leadership talent. Maintaining our top human capital was an important element in what we have been able to accomplish and is another reason why I have a lot of confidence in our company’s future. Maybe most importantly, our loyal customers have stood by us during this time. We have been able to keep our share and in several instances have been able to grow it so many thanks to our customers.

To capitalize on the success that the ceramic business group has experienced, we consolidated our ceramic and film electrolytic business groups. This new business group will be led by Chuck Meeks, formerly Senior VP of the ceramic business group. The consolidation of these two businesses will allow us to capitalize on the ceramic team’s proven track record and redirect the business. Chuck and his team will continue to manage the ceramic business while also applying their experience to the planned restructuring activities within F&E business.

The ceramic business has been able to maintain and even improve its performance during the recent challenging business environment. This combination will bring a strong management team to our plan to bolster the operating results of the previous F&E group. It will strengthen our overall financial performance and provide additional shareholder value. We have also reorganized and inserted additional management personnel to manage this new business.

We are now ready to begin the redirecting of our European business with the goal of accelerating its path to profitability. We recently announced we reached an agreement with our three labor unions in Italy and with the regional government in [inaudible] Romania to proceed with these activities. The effort will allow us to produce special new products in Europe and the U.S. and shift standard and commodity production to lower cost regions.

We took a charge this quarter of $6.6 million which includes certain [period] costs for moving production equipment and actions we anticipate taking over the next few months. I will speak more about the restructuring efforts later during my comments on the business segments.

As we see improvements in our top line in both tantalum and ceramics we continue to develop and implement cost creep controls. We are seeing good controls over our cost structure as we bring additional capacity to meet market demand which we believe will facilitate continued improvement of margins.

We know there is an interest in our shareholder base of understanding when the company will be relisted on the major stock exchange and what I can tell you today is we are in dialogue with the American Stock Exchange regarding listing on their exchange.

With that I will now turn it over to Bill Lowe to review in detail our fourth quarter financials. Bill?

Bill Lowe

Thanks Per. Good morning everyone. I will begin our review on slide three if you are following along on the website presentation which is income statement highlights.

Net sales for the quarter were $213 million compared to $200 million for the third quarter of fiscal year 2010, up 6.5%. Gross margin is 20.2% up from 18.2% in the prior quarter. SG&A was $24.9 million, up $2.7 million over the prior quarter but we do expect the run rate going forward during our next fiscal year to be approximately $23 million per quarter. On a GAAP basis which includes all restructuring charges and debt amortization our net income was $317,000 which of course is less than $0.01 per share.

However, turning to slide 5, we posted a non-GAAP adjusted net income of $8.8 million or $0.11 per basic share or $0.06 per diluted share for the quarter compared to an adjusted net income of $4 million or $0.05 per basic share or $0.03 per diluted share for the prior fiscal quarter ended December 31, 2009. As Per will discuss later, revenue was up across all sectors again this quarter and orders remained strong.

Turning now to slide 6, EBITDA for the quarter was $25.4 million, exceeding the top end of our forecast range of $22-25 million we announced on April 8. EBITDA for the full fiscal year was slightly over $71 million. Per started the call with a comment about what a difference a year makes. Turning to slide 7 puts that comment in financial terms. There are many takeaways that you might get from this slide but I would point out one key measure. We have discussed with you in the past we have reduced our overhead expenses significantly on an annual basis.

This is clear by evidently looking at the first bar on the far left hand side of this chart which was the quarter ended September 2008 prior to the recessionary impacts. Our operating margin in that quarter was 11.9% on $235 million of revenue. Now looking at the current quarter on the far right our gross margin as we previously stated is 20.2% on $22 million less of revenue. We remain focused on not allowing our fixed costs to be reinstated at the higher levels of the past. You can find a reconciliation of our EBITDA to net income on slide 9.

Turning now to the balance sheet highlights on slide 8, our unrestricted cash increased to $79.2 million, up $14.2 million over the prior quarter of $65 million. Cash generated from operations on the cash flow statement for the quarter was $18.7 million and $54.6 million for the full fiscal year. Net working capital decreased from the last quarter to $213.5 million versus $220.1 million and capital expenditures were $5.3 million for the quarter and $12.9 million for the full fiscal year.

For this next fiscal year we would expect CapEx to be in a range of approximately $20-25 million. I will make one final comment on this slide before turning the call back to Per. I would like to call your attention to the debt discount amount of $34.2 million. As a result of paying off the debt this quarter in the current quarter related to the discount in the month of May we will be required to record a GAAP loss on the P&L to unwind this discount during our current quarter ended June 2010. We will of course remove this loss in calculating our non-GAAP financial results so you can compare our operating results on a consistent basis but we wanted to make you aware of this in advance.

Now I will turn the call back over to Per.

Per Loof

Thank you Bill. I will start with film and electrolytic. We did see a continued increase in demand across all regions in the fourth quarter driven primarily by AC and DC film products and our machinery business.

Revenue increased in the fourth quarter by approximately $6 million or 10% over the previous quarter to approximately $66 million. The new order rate continued to increase in the fourth quarter as the book-to-bill improved to 1.62. We are fully loading our low cost Asian manufacturing locations and continuing to utilize temporary headcount reductions in Europe to leverage costs in line with the demand from these locations.

Margins moved in a positive direction in the fourth quarter driven by fixed cost dilution with increased volume as well as continued focus on mix optimization and overall cost reductions. Inventory turns improved to 5.7 turns in the fourth quarter as focus on working capital generation continued across the business.

The reorganization process for the European business is underway. The initial lines are en route from Europe to Mexico. Additional lines are scheduled to move over the next several months. We continue to work closely and effectively with our union partners in Europe to accomplish this. This activity will continue in parallel with our global focus on improving manufacturing efficiencies. We will in total spend about $35-40 million over the course of the total restructuring activity.

However, we expect the return of this investment to be relatively quick and quite substantial. During fiscal year 2010 this business lost $24 million in adjusted EBITDA. We expect beginning with fiscal 2013 or our first fiscal quarter beginning April 2012, barring any unforeseen macroeconomic issues the contribution of this business will at an approximate rate of $6 million per quarter. This represents a $48 million annual return on a full run rate basis upon completion of this reorganization effort. This was long overdue. However, we now have the cash, the management and the plan to accomplish this goal.

In our ceramic business fourth quarter revenue improved by about 12% compared to third quarter to approximately $51.4 million. Gross margins increased from 31.3% in the third quarter to 33.8% in the fourth. This as a result of fixed cost dilution with the incremental revenue and continued focus on product mix optimization and manufacturing cost initiatives.

Operating income continued to improve increasing 29% in the fourth quarter to $10 million. Inventory turns improved to five turns as a result of continued efforts to maximize working capital. The book-to-bill ratio for the fourth quarter was approximately 1.2 as book gains remained strong across all regions and segments. Capacity utilization increased a bit. We are now at about 70% in the fourth quarter and it is expected to continue to increase through the first quarter of fiscal year 2010. We do continue to add capacity very cautiously and related only to business that will positively impact our bottom line.

Turning to our tantalum business, we saw our third consecutive quarterly improvement in revenues. All three regions and sectors remained strong with continued strength in automotive, industrial, wireless and computers. Sales revenue were $95.6 million up about 2% from the third quarter. Inventories in our distributor channel continue to be flat to down in all regions representing what we think is continued market strength. The book-to-bill remained strong throughout the quarter ending at 1.5.

Capacity utilization remained very high at 95% in total with very strong polymer and MnO2 demand across all regions. We are running 24 hours a day, 7 days a week in our Chinese and Mexican facilities. With regards to tantalum raw materials there is a discussion in the marketplace regarding the availability and pricing of tantalum powder and [inaudible]. Our ability to mitigate the supply risk is impacted positively we believe through our mix sourcing strategy with multiple suppliers for most products.

We have less leverage when it comes to the cost of tantalum raw materials, however, and while we see speculation in the market with regards to materials availability our strategy and view makes us cautiously optimistic that at least for KEMET supply should not be an issue.

Let’s look at sales on a regional basis. Asian sales revenue for the fourth quarter was $78.6 million, an increase of 10.7% compared to $71 million for the third quarter of fiscal year 2010. The book-to-bill ratio closed at 1.5 for the fourth quarter. Market demand remained strong in the quarter especially for tantalum, MnO2 and polymer and film electrolytic capacitors. Orders continue strong as a result of positive local market sentiment, the recovery of export markets and the upsurge of smart phones, notebooks, 3G wireless cards, LED/LCD TV and telecommunications.

Orders from the [EMS] segment have also been improving with numerous requests for delivery for tantalum, film and ceramics. Inventory levels for distributors are at record lows due to strong market demand. We foresee the market momentum will maintain itself over the next 6 months which is actually as far as we can see. As the global market continues to rebound and China fiscal policies continue to drive local demand, extended lead times and revenue growth will continue.

The market recovery witnessed in Europe during the third quarter of fiscal year 2010 continued into the fourth quarter. Our European fourth quarter revenue grew around 11% compared to the previous quarter. Demand was strong from all sectors in the market particularly in automotive and distribution and across all of the business groups. Book-to-bill for the fourth quarter in Europe was 1.42.

Evidence suggests that product being shipped into the European market is being consumed rather than going into inventory. We monitor distributor inventory levels very carefully and we have not seen any significant growth in relation to resale value. Demand for products from the distribution channel continues to be strong and this is reflected in their resale numbers to the market. In Europe fiscal year 2011 has started in the same way as witnessed in the second half of fiscal year 2010 with demand still very strong.

The Americas, business conditions in the fourth quarter strengthened in the Americas market driven by improved end demand and inventory replenishment across a wide range of market segments. Revenue increased by 3% in the third quarter, bookings were strong and we ended the quarter with a 1.21 book-to-bill ratio. Demand from the second and third tier customers rebounded nicely during the fourth quarter as evidenced by a 24.9% growth in distribution POS.

We entered the first quarter of fiscal 2011 with a healthy backlog and a book-to-bill of 1.52. We expect demand to remain strong, lead times for many products will remain extended and average selling prices to drift upward. Reviewing the activity in the various market segments we have continued to see revenues rebound across all segments. Telecom for us increased slightly to more than 22% of total revenues in part based on continued strength in Asia. The computer and consumer segment maintained a 16% and 10% respectively. Transportation continues to be strong at 60% of our revenues. Industrial and lighting combined 27% in part based on the upward trend in demand from Europe and the military/medical segment maintained a combined 9% with stability in both segments.

In conclusion, our initiatives over these past two years have enabled us to strengthen our balance sheet, increase our cash flow, improve our operating margins and return to profitability during a time of extreme market instability and worldwide recession. More work remains, of course, but I am confident in our team that has led us through this maze. We will build on this new foundation during the next fiscal year. As always I want to thank all of our employees for their hard work and effort that have helped the company achieve the many goals we have set this past fiscal year.

Also thanks to all of our customers and partners throughout the globe because in the end as we all know nothing much happens without an order. This concludes our prepared remarks. We would be happy to respond to any of your questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Anna [Gosky] – No Company Identified.

Anna [Gosky] – No Company Identified

First on the restructuring costs, the $40 million, in the past you have talked that about $7 million of that would really be timing on working capital as you need to build inventory on the F&E segment as you are moving the lines. I know that is not reflected in the quarter you just reported but I wanted to understand when that will start being reflected because you have lines in transit now so I would think in this current quarter we will start to see that. In particular with the very strong book-to-bill and the demand in that segment what is your comfort level in being able to meet the demand while you are in the process of moving the production lines and is there any change to your assumption that is really about a $7 million cash use?

Per Loof

We still believe it is going to be a $7 million cash use. Of course some of it is already starting to happen. Some lines have already been created and are up and running, so to speak. We will see that build over the next 2 or maybe 3 quarters and then of course as it goes in and out again of course. So we have not changed our view as to the need for that inventory build.

How we juggle the market demand and moving equipment is of course an interesting management challenge. Our view is even though the times now are very good it is very important we continue with this effort and hopefully we will have enough capabilities in various places to meet the demand we have committed to our customers. But it is of course going to be an interesting challenge.

Anna [Gosky] – No Company Identified

On the topic of the restructuring, the impact of a lower Euro now that would seem to have potentially a positive impact on your restructuring costs in Europe. I wanted a better understanding of how that sort of nets through your business and P&L generally.

Per Loof

Our sales in Europe on the top line is about 70% of the sales in Europe is in Euros. The rest is in dollars. Of course, a lot of the cost structure in our F&E business is European based. We have activities in the Pound and a few other currencies as well of course but it all sort of hinges on what happens to the Euro. The fact that the Euro is now, I didn’t look this morning, but it is probably in the $1.22-1.23 range and that will of course help us because the cost structure is going to be impacted constantly by this.

Interestingly enough it is kind of where the Euro was when we bought these businesses. Not only did we have a recession but we also had a very strong Euro so both of those things sort of impacted us negatively. But net/net this is going to be positive.

Bill Lowe

I would echo that. There is a little bit of arbitrage in that percentage that Per gave on having some of the sales in Europe in U.S. dollars and 100% of our costs effectively in Euros. So a little bit of positive arbitrage there. Then of course funding some of the costs it will cost us less to convert those dollars we might use into Euros to pay those costs.

Per Loof

But we have planned for a much stronger Euro than we are seeing right now.

Anna [Gosky] – No Company Identified

Still on the restructuring, you talked about and have previously released that you came to these agreements that were required in Italy. You are doing some restructuring in some other locations in countries in Europe. Is there anything that is required or still a hurdle in any of the locations outside of Italy?

Per Loof

In most jurisdictions in Europe, as I am sure you know, there are varying degrees of discussions that need to take place and come to agreements. I think Italy is a little more complicated in some ways than other jurisdictions but we have to have agreements everywhere. The reason we are focused on Italy is because it is such a large piece of it but the restructuring that has taken place across various parts of Europe and is now fully underway and the agreements are being reached with the various employee representatives in the various parts of Europe. We don’t see that as a major hurdle for us.

The reason Italy was so important is we had so much activity in Italy and we wanted to remain in Italy in a positive manner too. We didn’t want to just pick everything up and run away because we have so much technology capability there. So we wanted to maintain a strong, positive relationship with the employee organizations there.

Anna [Gosky] – No Company Identified

On the gross margin, I think I heard you say in ceramic it was 33.8% and I know you have said in the past over 30% on the gross margin on ceramic you felt was rich and probably not sustainable over the medium term. I wanted to understand what was behind that improvement and if you still expect a reversion back to sort of the mid 20 area on that? I didn’t hear if you mentioned it the margin in the tantalum segment and wanted to understand what the impact of any issues on the tantalum supply is having on the gross margin.

Per Loof

As we talk margins, yes we do see the richness of the ceramics business. I guess what we are thinking is our ability to continue to grow our specialty business in ceramic we continue to be very successful in doing that. But we kind of have to prepare for a time when those margins will not be as healthy as they are now. As you saw, we did see an improvement this quarter by a couple of percentage points. We continue to see strength in that business and demand for the specialty part of that business which helps the margins and the manufacturing efficiencies are continuing to pay dividends and so forth. For now we continue to see strength. I think realistically in a more normal environment if there is such a thing in this business, then we would see those margins come down some. In the tantalum segment we were a little north of 25% this past quarter.

Anna [Gosky] – No Company Identified

So that is pretty stable. So there wasn’t any impact of any of these issues that may crop up on the supply?

Per Loof

You mean in terms of the powder?

Anna [Gosky] – No Company Identified

Yes.

Per Loof

We have been able to manage. We are seeing raw material prices going up a bit but we have been able to mitigate that through support from customers and pricing going in the right direction as well as quite a number of suppliers we work with in this segment. Five years ago we basically had one or maybe two suppliers. Now we have seven. Surely that helps us in terms of being able to have a much more stable inflow of capability as well as our pricing we enjoy or the costs we enjoy from these suppliers.

Operator

The next question comes from the line of Omar [Samulad] – No Company Identified.

Omar [Samulad] – No Company Identified

I am glad I am not the only one asking questions anymore. It shows on your progress and you keep doubling and redoubling your non-GAAP net income so that is going to bring more people interested. My first question is on the gross margin. If you could explain the increase in gross margin from last quarter. Was that directly related to the reduction in force in the F&E after the agreements with the Italian unions?

Per Loof

I will make a quick comment and then I will let Bill continue. No, we have not seen the restructuring in force improvements in F&E as of yet. But we did see improving business so we have some improvement in F&E. The gross margin in tantalum was right where it was in the third quarter. We saw a little bit of improvement in ceramics but that is a smaller business. I think the major improvements here actually was in F&E.

Bill Lowe

Probably primarily volume driven. Per talked about the 10% up in revenue and kind of reach a point sometimes where you cross a threshold and it starts to help your margins a bit from where you were before on your fixed costs. So it is primarily there. A little bit in ceramics as Per said and then just in mix and volume out of the F&E business.

Omar [Samulad] – No Company Identified

Will we see some let’s say short-term benefit to the reductions in workforce in the F&E in the couple of quarters coming in terms of gross margin?

Per Loof

We will continue to see improvements in gross margin as we implement these activities as well as a better mix and higher volume which of course will offset the fixed costs. We are more sensitive to that in F&E because of the fact we operate in jurisdictions where it is a little more difficult to vary the workforce but we will see and we believe we will continue to see improved gross margins on a quarterly basis going forward.

Omar [Samulad] – No Company Identified

So what was the adjusted EBITDA for F&E this quarter?

Bill Lowe

We typically don’t disclose individual EBITDA. We tried to give you an idea of where the restructuring benefit comes from, give you a run rate for last year but that is new and we typically don’t provide that.

Per Loof

What we have said is we believe that the benefit on an annualized basis is going to be almost $50 million.

Bill Lowe

If you look at our formal remarks we said last year it was an average of about a negative $6 million per quarter.

Omar [Samulad] – No Company Identified

So would it be fair to assume for fiscal year 2011 we could expect it to at least be neutral?

Bill Lowe

If you look at the press release what we said we expected in fiscal 2011 is that business based on our plan would contribute $10 million negatively less this past year so we expect an improvement of $10 million over the prior negative for the contribution. Then of course you see the real leap as we move into fiscal 2012.

Omar [Samulad] – No Company Identified

Why was SG&A higher than the $22 million and change we previously thought it would come in? I know you said that you expect it going forward…

Bill Lowe

It is three categories. A little bit of legal expenses on a variety of things. Then to be quite frank some accruals as we went through the fiscal year on both selling expenses and incentive compensation that as our earnings leaped up on us in the last couple of quarters and it wasn’t quite ratably through the year. I don’t expect to see that kind of run rate as we go into the next fiscal year.

Per Loof

To be quite honest we are happy with our performance. This fiscal year it was actually better than we had anticipated and that is why we had to increase the accruals in the latter part of the year.

Omar [Samulad] – No Company Identified

I am happy too. What was the cash restructuring charge for the quarter and what do you expect it to be next quarter?

Bill Lowe

The accrual this quarter was 6.6. The cash portion of that was 1.2 to 1.5 I believe which is mostly moving costs. That is of course not the complete picture. We will see another $5-7 million probably accrued over the course of another quarter or so.

Omar [Samulad] – No Company Identified

And the cash?

Bill Lowe

You can just assume those numbers will turn to cash over the course of the fiscal year.

Omar [Samulad] – No Company Identified

So now after you did all the refinancing which I thought was quite a feat you accomplished. Not only did you do it before this crisis started up again in Europe but you saved like $20 million.

Per Loof

Timing is everything.

Omar [Samulad] – No Company Identified

Exactly. You saved like $20 million just in the foreign exchange rate. What is going to be your cash interest expense run rate going forward and your interest amortization expense going forward?

Bill Lowe

Well you can calculate the straight rate off of the $230 million at the 10% rate. The only other debt we have at least until November of 2011 is 2.25 on the $40 million and then we have a little bit of interest on some of the sub-debt so I believe the run rate in total interest expense per quarter is about $5.6 million or $6 million probably.

Omar [Samulad] – No Company Identified

That is the cash part or the total part?

Bill Lowe

Ultimately that is cash because we are going to pay semi-annual payments on the indentures. And we pay interest on the converts as well as some small principle. We will also be paying some principle payments on the small debt in the subsidiaries, probably $4-5 million. If you look in our short-term on our balance sheet, our short-term debt, at March it still shows about 17 but on April 1 we paid UniCredit almost 10. So going forward what you will see in the short term in that category is about $5-6 million probably. What that represents primarily is principle payments on the debt in the subs which at that rate in about 24 months that would be zero.

Omar [Samulad] – No Company Identified

Will you still have a small…

Bill Lowe

We will have a small amount of amortization that results from the costs associated with this transaction. Let’s assume if it is over 8 years it is probably about $1 million a year I think. Something like that. Maybe less. Maybe $200,000 a quarter. It is not huge.

Omar [Samulad] – No Company Identified

AVX is expecting to reach pre-crisis levels in revenues this calendar year. How do you feel the rest of the year play out for you and what is your outlook for next quarter?

Per Loof

I think we ought to at least keep pace with our friendly competitors. Not that we will also move to Greenville. We typically don’t offer revenue projections but I think we are seeing and I said in my remarks we have not seen a dilution of our share in the business. We see the business going strong. We all are worried of a macroeconomic event that will slow things down but I think most commentators and pundits are projecting the current strength of the economy at least over a longer period will continue. So I think we hope we can return to pre-recession levels at least on par with AVX.

Omar [Samulad] – No Company Identified

So would it be out of whack to think of at least a mid single digit quarterly increase for the June quarter?

Bill Lowe

It wouldn’t be out of whack.

Operator

The next question comes from the line of [O.S. Hamad] – No Company Identified.

[O.S. Hamad] – No Company Identified

Earlier on you said you see gross margin improving quarter-over-quarter. Am I correct in hearing that?

Per Loof

Yes.

[O.S. Hamad] – No Company Identified

That is great news. Understanding you don’t give revenue guidance and things have really changed in the past few weeks in Europe particularly, I guess a two part question; you have already addressed part of this in the context of restructuring but on your top line how does the Euro dropping to where it is now and potentially going even further impact you just on a translation basis? Then how are things panning out in Europe as of the most recent past week? I know things have been very strong 2-3 weeks ago but do you think things may have changed in the past week or so?

Per Loof

We of course look at our inflow of orders and sales on a daily basis. We have not seen any pull back in demand in Europe. Part of the reason for that I think is most of our business is with export related industries. So a lot of our business in Europe is automotive. A lot of it is industrial products. A lot of it is telecommunications and much of that is export oriented which actually is being helped by the lower Euro. From what we can see we have not seen any effects on order intake over these last months or so if you want to go back to when the first pick up and increase happened.

In terms of the top line we do 70% of our business in Euros so I would say let’s say Europe was almost $80 million this past quarter, 7 x 8 is 56. You take 5-6% off of that and that is kind of what we will see on the top line on a quarterly basis. The arbitrage with the cost structure we have in Europe that is not only going into our European business but also is exported outside of Europe will have more of a positive effect for the company. It is a little difficult to see whether this trillion dollars that allegedly is going to be put to the support of Southern Europe and how that is going to affect what goes on in Europe I think everybody is waiting to see how that will transpire. So far we have not seen any impact on our business.

Operator

The next question comes from the line of [Ram Vemeri] – No Company Identified.

[Ram Vemeri] – No Company Identified

My question is about market share. We [inaudible] of $117 million in the March quarter, down 2% quarter-over-quarter. Is it fair to assume you may be taking their market share?

Per Loof

If they reported they were less this quarter than last quarter and we were up maybe we did take some. What I said in my remarks is I think we have seen our customer share steady and improving and we believe our market share in major markets is actually going in the right direction. Maybe we did take some share from Vishay but maybe there were other reasons for what they had to do. Maybe they were running short of capacity and trying to make some moves and so forth. So it is a little, you can’t really look at it on a quarterly basis. You have to look at it on a much, much longer basis. They are a fierce competitor. I wouldn’t take a couple of percent improvement in a quarter and make much out of that.

Operator

The next question comes from the line of Bryan [Reubens] – Mitsubishi Securities.

Bryan [Reubens] – Mitsubishi Securities

Employee numbers. What is going on there in the last quarter and what are your intentions in the upcoming quarter?

Per Loof

If you go back a year we were at 9,000 employees at the end of March 2009. This quarter up about 1,500 net so we were at 10,500 and of course those numbers are increasing particularly in Mexico and Asia. As we bring more capability on line we will see employment numbers increasing. As you may remember we are also going together with the U.S. government putting a plant in [Simpsonville] and that will increase the employment here. We will see that starting to happen towards the end of this calendar year. I think we are going to see employment numbers strengthening but of course we are very cognizant of the fact we need to keep costs under control and when things look up and cost creep is easy to happen and we need to make sure that doesn’t happen. In terms of employment I think we are going to see the employment numbers increase as volume increases.

Bryan [Reubens] – Mitsubishi Securities

With regards to CapEx I think you said you spent about $5 million or so or not quite half of what you spent in the full-year in the last quarter. Is that right?

Bill Lowe

That is correct.

Bryan [Reubens] – Mitsubishi Securities

Part of that was in Mexico but as well next year you are looking to almost double your CapEx on a year-over-year basis. I am kind of just interested in where the focus is there.

Per Loof

The focus, we have as I have said part of it is going to go into this new plant we are building here in [Simpsonville]. The machinery actually. We have the building. Part of it is going, we just opened our second facility in [inaudible], or third actually but the second facility right where we have our major activity there. We are going to have some CapEx going into that business particularly going into the polymer type of activities. So that is one focus. Then of course we have some CapEx that relates to the restructuring facilities.

Bill Lowe

Right. Both restructuring and the land there for the new facility in Italy that was a few million dollars. So that is about where it is broken down at.

Per Loof

I think going forward that is going to be the focus. I think for the business we had planned over the next couple of years to bring CapEx up to about $30 million which we think is something that can be sustained over a long period of time. We took it down to $13 million because we needed the cash for other activities.

Bill Lowe

The $20-25 million probably this next fiscal year and we have been saying as you move into 2012 to Per’s point it is probably at a run rate of around 30 if you model it out that far.

Operator

The next question comes from the line of Omar [Samulad] – No Company Identified.

Omar [Samulad] – No Company Identified

I also wanted to know the size of the NOL remaining. Do you have that handy?

Bill Lowe

In the U.S. it is in excess of $300 million and we probably have almost $30-40 million in Europe. There is almost $60 million I believe in Italy so yes, there is some in Europe as well.

Omar [Samulad] – No Company Identified

So $300 million U.S. and say…

Bill Lowe

Call it $60 million plus in Europe.

Omar [Samulad] – No Company Identified

In dollars right?

Bill Lowe

In dollar terms.

Omar [Samulad] – No Company Identified

Can you please go over the listing status?

Per Loof

I think with regard to the listing status we have said what we can say at this point. You can read into that what you need to read into that.

Operator

The next question comes from the line of [O.S. Hamad] – No Company Identified.

[O.S. Hamad] – No Company Identified

Could I get a better sense of the tantalum issue you said you might be seeing on the pricing side? Could you give me a quick overview of what is going on over there?

Per Loof

There is, as I think with many materials, we are seeing an increase in raw material prices across the board and we are seeing that in tantalum as well. I think there has been a conversation in the industry about availability of powder, availability of wire.

What I said at the beginning of the call here is we believe the fact we actually have several suppliers, seven in total, that we work with and have contracts with these folks we believe that during the foreseeable future we will not be a supply issue we believe at this point for us. But I think you will see prices coming up a little bit. We fully expect we should be able to mitigate the effects of that through increased pricing as well as increased yield and efficiencies.

Operator

At this time there are no further questions.

Per Loof

Thank you very much for being on the call. We look forward to talking to you again in 3 months and hopefully at that time we will continue to see improvement in our business.

Bill Lowe

Thank you for your interest in KEMET.

Operator

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 Corporation F4Q10 (Qtr End 03/31/2010) Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts