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KEMET Corp (NYSE:KEM)

Q4 2014 Results Conference Call

May 08, 2014 / 09:00 A.M. E.T.

Executives

Richard Vatinelle – Director of IR

Per Loof – CEO

Bill Lowe – EVP and CFO

Analysts

Param Singh – Stifel Nicolaus

Hamed Khorsand – BWS Financial

Gil Nathan – Candlewood Capital Management

Operator

Good morning. My name is Melissa and I will be our conference operator today. At this time I would like to welcome everyone to the KEMET reports preliminary fourth-quarter and fiscal year 2014 results conference call. (Operator Instructions).

I would now like to turn the call over to Richard Vatinelle.

Richard Vatinelle

Thank you, Melissa. Good morning and welcome to KEMET's conference call to discuss the financial results for our fourth 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.

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 of these 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-Ks, 10-Qs and registration statement filings for additional information on risks and uncertainties.

Now I will turn the call over to Per.

Per Loof

Thank you, Richard, and good morning, everyone. We are pleased to report to you today that on a non-GAAP basis we earned a $0.01 per basic and diluted share. Our total revenue was up 4.1% over last quarter at $215.8 million and as anticipated our non-GAAP gross margin of 17.6% was slightly down from last quarter.

Business conditions continue to improve. We estimate, by the way as do our distribution partners, that we will experience a general trend of an improving economy. We believe this trend will extend well into 2015 and 2016. Yes, we did see good growth this quarter really across the board and especially in automotive, industrial and in our specialty businesses in medical, aerospace and downhole drilling.

From a regional perspective, Americas and EMEA delivered strong growth. We expect that to continue. Asia, however, retracted as expected this quarter.

We have started strong in the first quarter and our book-to-bill today is 1.19, 119. We were happy to announce that our Q4 distribution sales were strong, being backed up by strong POS numbers from our distribution partners.

The current disti POS run rate is very encouraging. While distribution was strong, the overall revenue increase of over 4.1 quarter over quarter was as I mentioned, generally across the board. I am pleased to see it finally moved in this direction.

I will talk more on the components of revenue later when we discuss the business units and our regions but overall, we are happy with the outcome of the quarter.

We knew we were going to have two major plants out of commission this quarter as we completed our Pontikia [ph] moves in Italy. The product mix as we commented during our call in January in our fourth quarter is not as sweet as in the December quarter. That combination, that sweet product mix, that two plants down the entire quarter, the team did well. We are convinced that we are positioned well as we move into another fiscal year.

I will now turn it over to Bill to go through the numbers and come back to you with some detail on the business units. Bill?

Bill Lowe

Thank you, Per, and good morning, everyone. I will begin my review on slide four if you are following along on the slide deck which is on the website. As a reminder these results included in the presentation have been adjusted to reflect discontinued operations as the film and electrolytic business unit disposed of its machinery unit.

As Per said, net sales of $215.8 million were up 4.1% compared to the prior quarter of December 31 at $207.3 million and up 8.2% compared to net sales of $199.5 million for the quarter ended March 31, 2013. On an annual basis, our fiscal year 2014 sales were $833.7 million, up slightly compared to $823.9 million for the previous year.

Our non-GAAP gross margin as a percentage of sales decreased 90 basis points to 17.6% compared to 18.5% in the prior quarter and our non-GAAP net income was $0.01 per basic and diluted share and adjusted EBITDA for the quarter was $21.6 million, down slightly from $23.2 million for the prior quarter ended December 31.

Referring back to slide three, our GAAP loss for the quarter was $0.34 per basic and diluted share.

Skipping forward to slide eight as I refer to capital expenditures, the capital expenditures for the quarter were $7.2 million and $32.1 million for the year which is right in line with our forecast of $32 million for CapEx for the year. Our cash in the bank at March 31 was $71.4 million, up from $69.6 million also on par with our forecast.

On Monday of this week, May 4, we filed and 8-K indicating that we had renewed and extended our revolver term to December 2015 and for the complete terms of that revolver, I refer you back to the 8-K. As a result of this renewal we also reclassified on the balance sheet $18.5 million of our revolver debt from short-term to long-term on the balance sheet.

One more brief comment regarding the revolver is that during the quarter we paid back $2.6 million on that revolver.

Further from a cash perspective, we closed on the machining business and you see the cash from the sale during the last week of April.

I would like to conclude my comments with just a few remarks about NEC TOKIN's financial performance. We continue to be pleased with their progress at NEC TOKIN. Revenue in Q4 came in at $124.2 million and EBITDA for the quarter was $10.7 million. Our share of their net loss was $4.6 million which includes a one-time charge for impairment on certain assets and their cash balance remains healthy at $110 million.

Now I will turn the call back over to Per to discuss a few of the markets and our business units. Per?

Per Loof

Thank you, Bill. Let me start with a few comments about the solid capacitor group. Revenue was up $7.2 million or approximately 4.5% versus Q3. Within the overall revenue picture, the ceramic product line revenue was up $6.5 million or 11.2% and tantalum was up $700,000 or 0.7%. The margin improved by $2.2 million or 6.3% quarter over quarter mainly as a result of favorable cost actions that we have taken.

We did also enjoy a strong revenue performance from our specialty products. Our cost improvement performance is linked primarily to continued progress in the tantalum (inaudible) integration area of our business. Another solid quarter from this business group.

In our film and electrolytic business group, revenue increased to $52.5 million in Q4 from $51.3 million in Q3 or 2.5%. The increase is attributable to OEM business in EMEA in both the industrial and automotive segment. As you know and as I just commented and also we talked about in prior earnings calls, we have been in the process of consolidating two plants in Italy into one plant. All the equipment is now in our new Pontikia facility and we were basically able to begin and complete this process within one quarter. We will celebrate the grand opening of our newest facility May 21. Hats off to the F&E team for being able to accomplish this task within our planned time horizon.

A consequence of moving so much equipment and the closing of facilities was negative on performance of course, thus the impact on Q4 was significant. However, is now behind us.

I expect the F&E operating performance to improve throughout this fiscal year and beyond. As our planned consolidation effort is complete and we can focus our team on developing and designing new products for our customers and increasing plant efficiency.

Now to our regions. In EMEA, the revenue for Q4 was $79.5 million which was an increase of 16.9% over the previous quarter. We have seen those increases across all markets but particularly within the automotive segment and our distribution channels. Distribution POS sales in Q4 reached a record high level. Book to bill as of today in EMEA is 1.22.

In the Asia-Pacific region, component sales were down 7.4% quarter over quarter. There was a strong upside in March distribution POS however increasing $4.7 million as compared to February. The overall consumer market remains flat and we are seeing some positive signs from the green energy market beginning now to recover. The automotive market continues to remain strong. Book to bill as of today is 102.

Q4 revenue in the Americas region finished up slightly over Q3 as overall end demand continues to slowly improve. Revenue was $70.1 million, up 3.3% over Q3 and POS grew 16%.

We continue to see a very strong demand from our automotive segment and we are beginning to see an improvement in industrial. Book to bill as of this morning was 1.38.

To sum it all up, the effort this year, we turned the corner has yielded the expected results. We have more to come as we further harvest the fruits of our actions, reduce our costs driving further gross margin improvements, focusing more on specialty products, underlying our R&D investments in line with this strategy.

We have sold, as Bill said, a few non-core businesses where we believe they will be housed better where they now are residing. Our refitting and restructuring efforts in our F&E business will drive much improved performance. As I said, improvements will continue to be realized during this fiscal year and also into next year.

The vertical integration investments that we have made are now underway yielding very respectable returns. We will be able to reach our objective of sourcing 80% of our powder and wire needs from our own efforts.

We will later this month be filing with the SEC that all of our surface mount tantalum, (inaudible) and polymer as well as our aluminum polymer products are conflict free and our sustainability project in the DRC is coming along nicely. We will be able to open our first school and our first clinic in a few months in the Village of Kisengo, providing help for the people that help us mine the material that we need.

The joint venture investment with NEC is ahead of plan and we continue to improve its performance this coming year. I expect NEC TOKIN to deliver breakeven results very shortly. Just to share a little data point, since we started to sell NEC TOKIN products through our channels in late January, we have seen 638 new customers buy from us. The dollars are small of course but we are encouraged.

The combination of focused efforts to improve our operating performance in an improving economy leaves me today cautiously optimistic about the near and midterm trends for our business.

Now turning to our forecast for our first quarter of fiscal 2015 which began April 1. As I noted earlier, the macro picture in the US and Europe remains encouraging but of course clouds still hover over Europe with the (inaudible) effect in Ukraine.

We actually saw a better increase this quarter in our revenue than expected and we do not see any giant leaps out there so we believe that we will see another quarter like this one with a range of $212 million to $217 million in revenue with continued improvement of our bottom line. We believe this will extend into the year as well as the restructuring moves and cost improvement investments will take further hold.

As I said, even though we are in principle done with the major investments, further improvements will be realized as the final activities are completed later this fiscal year.

All in all a good way to close out the fiscal year and start the new. KEMET is in a much better place today than in a long time.

As always thanks to our hard-working employees that continue to make the extra effort to improve our performance and enhance our customers experience and this concludes my prepared remarks and we will be happy to respond to any of your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Param Singh with Stifel.

Param Singh – Stifel Nicolaus

Hi. Thank you. This is Param Singh on for Matt Sheerin. So firstly, I just wanted to get some color on your gross margins by segment. It seems you did get some benefit on the specialty components on the ceramic side but tantalum would be a little weaker. And I just want to get any idea of what benefits you are getting from your integration?

And also on the F&E side after you sold your machining business, margins seem to be lower this quarter. Is that only because of the two plan consolidation or was there something else there? Then I have a follow-up. Thank you.

Per Loof

On the F&E side, no, I mean the lower margins from last quarter is all due to the plant closing. So with our two biggest plants, we are actually out of commission for a whole quarter so that is what that is all about.

In the solid capacitor group, we saw improvement this quarter basically from our tantalum business. Ceramics continue to be strong and the improvement in margin in that business globally was from our tantalum space.

Param Singh – Stifel Nicolaus

And how much more benefit do you think you have coming on because you are still a little below your long-term targets and I mean do you need to see just volume pickup or is it more integration benefits?

Per Loof

We don't need volume. We are going to see further improvements this quarter and as you know, the improvements we do this quarter will actually affect the coming quarter so you are going to see over the year you are going to see continued improvements in our tantalum activity specifically as these investments that we have made actually come further along. And also we have a target of producing 80% of our powder and wire needs ourselves and we are not at that point yet. Of course the further we go up that chain the better off we are. We will see more performance improvements as the year tracks along here.

Param Singh – Stifel Nicolaus

Okay, great. On the distribution side, what have you seen sell-in versus sell-through? I mean are the (inaudible) building inventory? And then on the book to bill, are they all April numbers or are they for the quarter?

Per Loof

The book to bill numbers I was reciting was this morning. That is actually up this quarter which I think is probably more important than the March numbers. But we are seeing good, strong POS numbers across the board but particularly in Europe and in America and if you believe the run rates we are seeing in the POS business for our disti partners, they are going to have a very good year.

Param Singh – Stifel Nicolaus

And did you hear anyone building inventory or no?

Per Loof

I think it varies a bit depending on the strategy they have but we are not seeing any strange or huge inventory builds.

Param Singh – Stifel Nicolaus

And then one last question. On the NEC TOKIN business, they did have a GAAP loss but when you look at it in terms of buying other whole stake, is it on a non-GAAP basis and do you expect it sometime later this year or maybe sometime next year and what is your plan for that option?

Per Loof

I believe that TOKIN -- and there is really no difference between GAAP and non-GAAP here in this case really I mean. So that they will be breaking even basically on a full-year basis this year. And then build quarter over quarter.

Param Singh – Stifel Nicolaus

And your plan for either exercising that option -- is that still tentative later this year or are you going to wait and see how they perform?

Per Loof

We will wait and we will keep everybody posted as and when we take the next step.

Param Singh – Stifel Nicolaus

Okay, great. Thanks a lot.

Operator

(Operator Instructions). Your next question comes from the line of Hamed Khorsand, BWS Financial.

Hamed Khorsand – BWS Financial

Good morning. My first question was I don't know if you said it or not but was there going to be some sort of a cost impact as far as getting the plant back up for Q2, for calendar Q2?

Per Loof

No.

Hamed Khorsand – BWS Financial

Okay. As far as your margins go, given that it was impacted this past quarter, for the June quarter if we assume that revenue comes into your guidance, is it a good assumption that EBITDA margins should return to a little bit more of a normalized level?

Per Loof

I don't know what you mean by normalized level but EBITDA margins will improve, yes.

Hamed Khorsand – BWS Financial

Okay. All right. Are you seeing any kind of pricing activity as far as improvement in pricing?

Per Loof

We are seeing some extensions on products and we are seeing the ASP erosion which was pretty significant last calendar year. We have not seen that continue. So I think pricing is more stable now than it was previously which could be an indication that some lines are extended and people are taking appropriate actions to make sure that margins is preserved.

Hamed Khorsand – BWS Financial

Okay. My last question is what do you need to happen in the street for your revenues to get back to 2012 levels?

Bill Lowe

2012 levels meaning $1 billion, is that what you are saying?

Hamed Khorsand – BWS Financial

Yes.

Bill Lowe

I think we are not projecting the revenues to come back to that level now but I think we will have to see as the macro market improves, it is going to also improve our revenues. I think the whole notion here is that if GDP now which people believe tends to come into the 3, 3.5 range, a good number for us is really that we will be about 2X or 2X and a bit better growth than GDP. So you can do the math from that point.

Hamed Khorsand – BWS Financial

Okay. Thank you.

Operator

Your next question comes from the line of Paulina Sparks [ph], Metal Pages [ph].

Unidentified Speaker

Good morning. Could you please tell us a bit more detail about the performance in tantalum capacitors specifically and also what are your forecasts for this segment and also supply and demand for tantalum?

Per Loof

For the solid capacitor business group, which is the one that we break out in terms of all the specifics, we expect that group to be at our timeless model as we exit this fiscal and timeless model means a 20% margin, 45% gross margin. Basically what I can say though is that the improvement in margin is going to come from the cost improvements we are making in the tantalum business. In particular the vertical integration.

Unidentified Speaker

Okay. Could you tell us what your forecast is in general for that market this year where you are seeing growth areas, what other opportunities?

Per Loof

We are seeing -- the belief is that we are going to see an improvement in the market condition as I commented on in the beginning of my prepared remarks. And we expect that to increase across the year. Some of our disti partners are basically saying that they are going to see -- they are seeing 10% run rate improvements right now and they are expecting to see a pretty strong year and that is a pretty good indicator for us as well. So if the disti business does well, that means a lot of companies are doing well and that should impact us favorably as well.

So we are -- as I said, we are very bullish about the US and we believe that -- we are bullish about Europe and even thinking that they will surprise to the upside. I think Asia will be more stable than the other two in terms of growth. We think this year is going to be a decent year for the electronics components industry.

Unidentified Speaker

Okay. You said also that you are still aiming to source 80% of your supply for power and wire internally. Where are you now in this frame and how do you see other supply developing?

Per Loof

What we did this quarter we sourced about 69% of the wire and powder needs ourselves this quarter and we are also having good success in procuring the tantalum ore not just from one place but several places and that gives us a good cost improvement opportunity as well.

So we are going to improve in terms of the percentage of material that comes from our own sources as well as improving our cost performance in that activity.

Unidentified Speaker

So what do we need to do in order to achieve that 80% level?

Per Loof

We basically have to just continue to do what we are doing and increase our production capacity a little bit and also it is an engineering task as well because some of the powders we are in the process of developing and that will allow us to get to the 80% level.

It is more an engineering task then investment in facilities or finding more ore sources. Those we have. It is to ensure that the current R&D projects will deliver the expected results and thus we can increase our production capability to the 80% level which is our objective.

Unidentified Speaker

Thank you very much.

Operator

(Operator Instructions). You have a question from the line of Wamsi Mohan, Bank of America Merrill Lynch.

Unidentified Speaker

Hi. It is Rutufu [ph] filling in for Wamsi today. Per, just wanted to start by asking you in the past you have talked about some more cost saving measures in the first quarter and second quarter of fiscal 2015. Any updates on that? Are you planning any more restructuring or any more cost savings?

Per Loof

We have a number of activities that are ongoing and I don't want to comment on them specifically as you can well imagine but there are three specific activities that are planned for this fiscal year which will have a good cost improvement effect as well and those are continuing as per plan.

But no more buildings, we are not moving much and we moved the stuff now. It is making sure that all is put in place.

Unidentified Speaker

So the Pontikia move is all complete?

Per Loof

All done.

Unidentified Speaker

Okay, great. Just wanted to shift gears to NEC TOKIN. When I look at the results, they seemed to be a little bit lower this quarter. Was that just seasonal or is there anything more to that?

Per Loof

No, there is nothing more to that. That is just seasonal. They were down $1 million I think and so it was just seasonal actually. No, no major issues. They are continuing to perform well and also well above what we had expected.

Unidentified Speaker

So at this point, is there any change to your plans to acquire the remaining portion of NEC TOKIN or you are still on track? Just trying to see if there is any change to plans at this point?

Per Loof

There is no change to plan and as I said to another question this morning, we will keep you abreast of actions that we are taking. But clearly the objective of us and NEC TOKIN coming together has not changed.

Unidentified Speaker

Okay. When I look at the F&E segment obviously now that the restructuring is completed, you are going to see margin benefit hopefully this year. Any sense of how many basis points or any guidance you can give on what type of margin improvement we should expect in that segment?

Per Loof

You are going to see margin improvements quarter by quarter and some of the effects of all of the moves and things we have done will actually come into play -- some this quarter, some next quarter, some the third quarter and some the fourth quarter.

So I think the full effect of all of this won't be seen until fiscal 2016 actually. These things actually happen and as we transition activities the moves are basically done and the plants are built and there is no more construction going on but as we transition activities, that is going to take a few quarters to get all of that realized.

Unidentified Speaker

Okay. That is fair. And then in the past you have talked about possibly divesting or selling off the F&E business but now that the restructuring is done when you look at the next 12 months, do you think that is no longer in the cards or are you still open to that?

Per Loof

This is business. Everything is on the table for discussion but what I can say is that we sold off a few small businesses that were underperforming and didn't fit well with our overall strategy but I think right now we are continuing to improve the performance of F&E and we believe that when that is all done it is going to be a good contributing unit to our Company. If that changes we will of course review that again and see if further actions are required to improve the value of the Company.

Unidentified Speaker

Okay. Sorry, the last one for me is there any guidance on CapEx for fiscal 2015?

Bill Lowe

We haven't given it. But I am happy to give it. It is going to be somewhere I would say are around $25 million.

Per Loof

A little less than this year.

Unidentified Speaker

Okay. Thank you so much.

Operator

Your next question comes from the line of Gil Nathan, Candlewood.

Gil Nathan – Candlewood Capital Management

I wanted to talk about your balance sheet for a minute. Your bonds are callable. You just extended your revolver. Can you tell us a little bit what you are thinking there? Obviously you have had big improvements on your bottom line and EBITDA so just wanted to get your thoughts?

Per Loof

I can start in and then turn it over to Bill. Of course we know the bonds are callable and we will review if and when actions should be taken to do something about that. And I think the important thing in all of this of course is to improve performance. So the question here is really when is the market ready for an activity like this and how much do we want to wait to continue to improve our performance? Because if you look at this coming quarter, we will of course be a lot better than the Q1 we had last year and as we continue to build, we are going to see a nice improvement in our EBITDA performance.

Year over year our EBITDA performance was not bad but of course the first quarter last year we had a big issue that dropped our EBITDA quite dramatically and of course Q1 here is going to be all a lot better.

So we are looking at that and we are thinking about what is our best action and we are talking to our bankers and others to see what the right move is but we realize there is an opportunity now to do something and we may or may not do something at this point.

I don't know, Bill, if you want to comment on that too?

Bill Lowe

I don't think I really had any more to add. I think that Per is right, as you would suspect we are constantly in contact with our various advisors about what is the right timing to do something. It also ties together with what our timing is on potentially with NEC TOKIN and there's a number of factors that goes into it but we are well aware of it to your point that our financial performance has improved.

As Per mentioned, we expect it to continue to improve so we are cognizant of that. We are also cognizant of the fact that our current bonds carry a 10.5% coupon and we would like to see a number lower than that so I will leave it at that.

Gil Nathan – Candlewood Capital Management

Okay, great. I would think with a little bit of guidance that you just alluded to that you are going to have a better first quarter and a better year, you'd probably have little trouble refinancing those bonds remarkably cheaper. Thanks, guys.

Operator

There are no further questions at this time. I would like to turn it back over to management for closing remarks.

Per Loof

Thank you very much for coming to our call this morning and we appreciate the support and we look forward to talking to you in a couple of months and report an even better performance in Q1 than we had in Q4.

Bill Lowe

Thank you.

Operator

Thank you for joining today's conference call. You may now disconnect your lines.

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