KEMET Corp. CEO Discusses F1Q2012 Results - Earnings Call Transcript

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 |  Includes: KEM
by: SA Transcripts

KEMET Corp. (NYSE:KEM)

F1Q2012 Earnings Call

July 27, 2011 9:00 am ET

Executives

Dean Dimke – Director, Corporate Investor Communications

Per Loof – CEO

Bill Lowe – EVP and CFO

Analysts

Ritu– Bank of America:

Sherri Scribner – Deutsche Bank

Hamed Khorsand – BWS Financial

Amit Passi – UBS

Marco Rodriguez – Stonegate Securities

Tony Kure – Keybanc

Ana Goshko – Bank of America

Tony Venturino – Federated Advisors

Matt Sheerin – Stifel Nicolaus

Operator

Good morning. My name is Tina, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the KEMET First Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Dimke, you may begin your conference.

Dean Dimke

Thank you, Tina. This is Dean Dimke, Director of Corporate Investor Communications. Good morning. And welcome to KEMET’s conference call to discuss our financial results for the first quarter ending June 30th fiscal year 2012.

On the call with me today is Per Loof, our Chief Executive Office; and Bill Lowe, our Executive Vice President and CFO.

As a reminder to you, our presentation is available on our website that should help you follow along with the 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 homepage. Once there, click on the first quarter conference call link. That will bring up a few slides that we will call to your attention as we are covering those topics.

Before we begin, we would like to advise you that all statements that address expectations or projections about the future are forward-looking statements. Some of these statements include words such as expects, anticipates, plans, intends, projects and indicates.

Although, they reflect our current expectations, these statements are not guarantees of future performance, but involve a number of risks, uncertainties and assumptions. Please refer to our 10-Ks, 10-Qs and recent registration statement filings for additional information on risks and uncertainties.

And now, I’ll turn the call to Per.

Per Loof

Thank you, Dean and good morning, everyone. We are very pleased to report that our first quarter ending June 30 fiscal year 2012 was another strong quarter with revenues coming in at $290 million. Non-GAAP operating income was $45.2 million or 15.6% of sales. Non-GAAP fully diluted EPS was 71 pennies.

Additionally, we have continued strong top and bottom line performance across all business groups. These financial numbers validate our strategies and continue to build on our momentum. As encouraging as these results are we realize that we must stay focused on growth, maintaining our cost reductions and seizing opportunities.

One area that we have stressed is the need to find opportunities to vertically integrate operations to better control our supply sources and our cost structure.

This past quarter we found such an opportunity with the acquisition of Cornell Dubilier Foil, a Tennessee based process of aluminum foil utilized as a core component in the manufacture of electronic capacitors. The state-of-the art Foil facility is one of the largest of its kind in North America.

The purchase price is approximately $15 million and the long-term intent for this operation is to support our aluminum electrolytic capacitor operations within a short supply of high quality raw materials. In short, the exactly what we need to be doing and we will continue to look for these opportunities going forward.

Another example of how we are focused on gaining more control over our destiny by stabilizing our supply chain and ensuring availability of key raw materials it the initiative we are announcing today.

This initiative we are internally calling Making Africa Work. Over the past few weeks, Motorola Solutions and others have been in the news regarding their initiatives to source Conflict-Free Tantalum ore from the Democratic Republic of the Congo or DRC. We know these initiatives and we’d like to take a few minutes to discuss the efforts we have undertaken over the last nine months to source Conflict-Free Tantalum from the DRC.

We do believe it is imperative that we all do our part to put the DRC back to work with regards to the mining of Tantalum ore. Additionally, KEMET has what we believe to be a comprehensive plan for this asset. Our plan includes financial support for the construction of schools and medical clinics in the area where the Tantalum ore is to be sourced which is in the conflict free Katanga province of the DRC. Katanga is in the Southeast corner of the country bordering Zambia.

This area has been designed as conflict free by the implementing Non-Government Organization PACT, which actively instituting the international research institute defined back and tack program. This is a program that designed to ensure transparency and traceability of the Tantalum ore through the supply chain to the smelters.

As mentioned we’ve been engaged with this project for nine months now. If you refer to page two and three of the website slides you can see that our diligence included a visit by myself five months ago to the DRC in order to gain a firsthand understanding of the local mining situation, as well as the social and economic environment in the area.

We do expect that the involved parties will obtain the necessary third-party OECD, Organization of Economic Co-operation and Development conflict free supply chain certification by mid-August and our material can thus start to flow from the DRC to the smelters by early September.

We expect to see mechanize mining running side-by-side with small scale our Tisna [ph] mining thus addressing the need to recommence tantalum mining with DRC and meet the employment and economic development needs of local communities, while supporting the needs of the greater Tantalum industry. We expect the benefits, of course, our long-term assurance of supply and greater supply chain stability.

I cannot tell you how pleased I’m with the progress made over the past nine months and how well the industry has moved forward with regards to harmonization of processes allowing Tantalum mining to recommence in the DRC. Our efforts in the DRC reflect our commitment to quality products, superior service and high ethical standards.

Furthermore, we believe our DRC initiative sets a new standard for international best practices in the industry meeting all requirements and guidelines of the OECD, Organization of Economic Co-operation and Development. Additionally, we are comfortable with the overall process will meet the forthcoming Dodd-Frank Act Regulations.

This past quarter we saw another successful tender of offer of K Equity, an affiliate of Platinum Equity Capital Partners. They now tendered roughly 68% of the total number of shares available under the warrant and the current warrant holding post tender reflects about 15% of the company. The shares they tendered have been purchased by diverse group of holders adding stability into the stock which should help facilitate value generation.

Additionally, this quarter we joined the U.S. broad-market Russell 3000 Index, membership in this Russell 3000, which remains in place for one-year means automatic inclusion in the large cap Russell 1000 Index, small cap Russell 2000 Index, as well as the appropriate growth in value style indices. Russell determines membership for its equity indices primarily by objective, market capitalization, ranking and style of attributes. KEMET has been included in the Russell 2000 Index, obviously this is a positive for our shareholders.

We are making solid progress with our restructuring of our film and electrolytic business. In fact this past quarter we announced our plans to construct a new manufacturing facility in Skopje in Macedonia. This facility is a component of our long-term strategy of consolidating and maintaining manufacturing for European customer base, while fulfilling our objective of lowering the cost structure associate with our film and electrolytic business.

The initial facility will be a total of 10000 square meters manufacturing of municipal office space and employ approximately 300 people when fully operational. They expect a completion date of the facility is summer 2012. The investment in this facility including transferred assets is expected to be approximately €12 million. The cost of the facility construction during the company’s fiscal year is included in the previously announced capital plan for the year.

So, before I go into detail regarding the performance of the individual businesses. I will turn it over to Bill to review our financials for the past quarter. Bill?

Bill Lowe

Thanks, Per and good morning, everyone. I will begin my review on slide five if you happen to be following along on the slide deck that’s on the website and this is the income statement highlights.

Net sales of $290 million exceed our forecast for the quarter and were up 18.9% over last year's same quarter of $243.8 million in sales. Machine revenue from (inaudible) business was particularly robust as we shipped more than our original forecast and our mix of specialty products remains strong with ceramic and tantalum. We also benefited as we discussed on our last call with some forehead orders driven by the Japan earthquake and tsunami that occurred in the first calendar quarter.

Our SG&A expenses were $30.3 million, up slightly over last quarter but lower as a percentage of sales at 10.4% of revenue. Looking forward to next quarter, our expectation is that SG&A expense should be in the range of $26 to $27 million. Our GAAP net income was $31.8 million or $0.81 per basic share and $0.61 per diluted share for the quarter.

On slide six our non-GAAP gross margin as a percentage of sales increased to 27.4%, compared to 25.1% in the prior quarter. We do still expect a trailing impact of tantalum powder prices to negatively affect our margins over the coming quarter.

As noted on slide seven, our non-GAAP adjusted net income is $37 million or $0.94 per basic share and $0.71 per diluted share for the quarter exceeding expectations. Adjusted EBITDA was $56.3 million for the quarter, up from $44.4 million in the December quarter, sorry the March quarter and up a year ago $45.2 million.

Referring now to slide eight, our non-GAAP adjusted operating income was $45.2 million as Per mentioned and $14.1 million – a $41 million from a year ago in June of 2010, but also up over the March 2011 quarter of $33 million.

During the quarter we incurred $1 million of restructuring charges and $600,000 related to acquisition expenses and another $200,000 related to stock registration fees.

Now if you look at the balance sheet on slide 10. Cash end of the quarter was $134 million of unrestricted cash. This quarter did see a number of items that with the use of cash this is our semi-annual bond interest, incentive compensation and the acquisition of the Foil facility.

Our Tantalum group did build some inventory this quarter and we expect to see these values decline over the next two quarters, getting them back in line with our working capital goals.

Capital expenditures during the quarter were $5.7 million and I will remind you that we forecasted CapEx for the entire fiscal year to be between $55 and 60 million. We continue to maintain a balance DSO days and receivables and payables with DSO receivables now at 46 days and payable at 41, cap it by analyzing the current quarter’s net sales and our bank revolver continues to remain undrawn at this time.

Looking out to the next quarter which ends this September 30th, we see revenue up approximately 6% to 9% over last September quarter 2010, with reported revenue of $244 million. The drivers for the next quarter’s revenue compared to this March quarter is less machinery revenue, which we indicated to you in our last call that revenue would be a bit uneven from quarter-to-quarter.

The summer slowdown in Europe, distribution channel corrections and the positive impact of revenue we saw this quarter from the Japan tsunami that occurred earlier this year that will not repeat. While we although, we expect that the quarter will look similar to our March quarter of 2011 that we reported to you in May, but with potentially higher revenue.

We do expect some margin pressure from a change in our mix, as well as the impact of the summer shutdowns of our European based facilities. Overall, we are expecting a good quarter with results in line with the normal cycle which we see within the calendar year.

And with that, I’ll turn the call back over to Per.

Per Loof

Thank you, Bill. Let’s take a look at the business results by the three businesses, ceramic, tantalum and film and electrolytic, as well as our three regions Americas, Europe and Asia. I’ll start with film and electrolytics.

Revenue this quarter was a $108 million, up approximately 22% versus Q4 of fiscal year 2011. This increase in revenue was driven primarily by strong machining revenue of $26.1 million versus $6.7 million in the prior quarter. Gross margin improved to 25.7% driven by continued focus on cost initiatives, product mix, pricing optimization, as well as the volume effect of the cost dilution.

Operating income as a percent of net sales was 11.6% for the quarter, the order rate declined somewhat by 6% in Q1 versus Q4. However, our total film and electrolytic backlog remained strong and plant utilization is stable at greater than 85%.

Book-to-bill moved negative at the end of the quarter as a function of strong sales and the decline in orders driven by an inventory correction within the OEM and distribution channels, as well of course, the beginning of the summer slowdown in Europe.

Our ceramic business in Q1 revenue was up by 20% over the previous quarter to $59.4 million due to continued strength in the specialty business, as well as incremental revenue in business from the Japan supply constraints during the quarter. Q1 gross margin and operating income as a percent of sales, net sales both finished strong at 32% and 18%, respectively. As progress continued on product mix optimization and manufacturing cost initiatives. The Q1 book-to-bill ratio was 1:4, backlog remains stable and capacity utilization for Q1 remains strong at approximately 78%.

On the Tantalum side of the business we ended Q1 at $122.4 million, very similar to the previous quarter of $123.8. Operating income as a percent of net sales was 14.2% and gross margin as a percent of net sales was 26.8%. The Americas region was very strong relative to the previous quarter followed by Europe and Asia.

Inventories in the distribution channel remain at a level that allowed them to respond to customers' needs quickly. Of particular note, the automotive industry of green segment have been very robust. On book-to-bill ratio, however, is below 1 as we head into seasonally slower summer in Europe.

In the Asia Pacific region component sales for Q1 were $95 million, an excellent quarter driven by strong end customer demand from automotive, industrial and telecom, both smartphones and infrastructure, as well as power management. Certainly, the issues in Japan played a role in this strong Q1 demand. Channels and end customers are holding higher than normal inventories to buffer any continued impact from the situation in Japan.

Moving forward to Q2, market conditions looked to remain stable for green industrial applications, power management and tablets with the possibility of a slight quarter-over-quarter drop in automotive and even further softness in consumer and computers. As a result, we also expect to see some correction in the distribution channel as well.

The European market remains strong and relatively stable in Q1 with a marginal decrease in revenue compared to the previous quarter. All market sectors remain stable with the exception of the solar market which suffered some canceled and delayed projects.

Book-to-bill ratios during the quarter from both the overall market, as well as a KEMET perspective negative towards the end of the quarter largely driven by the high level of inventory and distribution channel, some inventory adjustments and reduction in lead times.

Looking forward to Q2 for Europe, we expect the market to reflect more seasonality than we saw last year with further inventory corrections in the distribution channel. There are some issues with the economist – economies in several countries are also likely to become a factor moving forward, although the effect of this is not just visible and the impact will probably only affect Q3 and beyond.

In the Americas region, component sales surged 19.3% in Q1 driven by solid end demand across most market segments and customers increasing inventory levels to protect themselves against any potential supply disruptions caused by the Japanese earthquake. We end the Q1 with a positive book-to-bill of $119 and a healthy backlog. During the quarter, average selling prices remained stable.

Going forward, we expect underlying end demand to remain stable across transportation, telecom, industrial and aerospace market segments. We expect demand from our military customer base to remain soft as funding continues to be delayed. We also expect bookings this quarter slow from the Q1 rate as our customers and distribution partners draw down inventory as the supply chain risks associated with the Japanese earthquake event.

From a segment perspective, all segments were either flat or up except military, which came in slightly below last quarter at 5% of revenue due to delayed contracts as mentioned previously. Telecom was flat on a revenue basis and slightly below last quarter at 16%. Computing was actually stronger than anticipated increasing to 60% of sales. Our consumer business was at 10% on slightly higher revenues as was industrial and lightning at 28 and medical at 4%.

The benefits of the Japanese crisis were seen in automotive with revenues increasing 6% resulting in 17% revenue share. We cannot be more pleased with the trends we’ve seen in our financial results and I would have to recognize the efforts of the global KEMET team has made to deliver results.

We continue to deliver strong results as world events have had a positive impact on our business. We believe this is at least in part the result of our strategy to balance our business from a product, segment and regional perspective. This certainly remains certainly moving forward as global events work themselves out. However, we believe we are positioned well and are cautiously optimistic that any correction in demand will be short lived.

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 the line of Wamsi Mohan with Bank of America.

Ritu– Bank of America

Yes. Good morning, this is Ritu [ph] filling in for Wamsi today. First of all, congrats on the quarter. Excellent results. I just had a couple of questions, you mentioned some revenue pull in because of Japan, can you quantify how much that revenue was?

Per Loof

I would say it is about $7 million to $8 million and a lot of it is in ceramics, actually. You know that’s where the – most of the revenue end of – pull in was.

Bill Lowe

And we said on our last call we thought it would somewhere in the high single-digit millions and that became in about that number.

Ritu– Bank of America

Okay. Great. And just looking at your competitors one of them recently signaled some order slowdown going into the September quarter. Have you seen any order slowdown entering July?

Per Loof

Our – the slowdown is – there is a little bit of slowdown in – orders as you would expect in the summer. You know, we have a huge share of our business in Europe and although less than in the past plants – the plant shutdowns, we shut down some of our plants during the summer and our customers do as well. It is only natural to see some order slowdown and revenue slowdown in the summer months.

Ritu– Bank of America

Yes. Okay. All right. And then moving into – moving towards your utilization rates, I was wondering if you can quantify by segment how much of your capacity you are currently utilizing? There was some concerns that overall in industry tantalum utilization is pretty high. So are you planning to add any capacity on the tantalum side?

Per Loof

No, we are not planning to add any capacity. We still have a little bit of capacity and we are working our lean initiatives which and our – and ensuring that we can get more out of the equipment we have and we have been very successful in doing that. So, we are not planning on adding any capacity in the tantalum space and then we think we are well equipped to handle some increase in demand and as we move forward.

Ritu– Bank of America

Okay. And just the last one from me on raw material costs. Given your efforts in the Congo, I mean are you still not getting into any long-term contracts for tantalum? Do you see tantalum prices lowering any time soon? I mean, what’s your expectation on raw material prices?

Per Loof

Our expectation is that the pricing has peaked and we expect prices to, you know – but very slowly start to come in and I think our strategy of not doing long-term contracts, I think, will at least for us will play out well.

Ritu– Bank of America

All right. Thank you.

Per Loof

But they are still very high, I mean, there is no question. The ore price is still very high.

Ritu– Bank of America

Okay. Thanks so much.

Per Loof

All right. Thank you.

Operator

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

Per Loof

Good morning, Sherri.

Sherri Scribner – Deutsche Bank

Good morning. How are you doing?

Per Loof

Good.

Sherri Scribner – Deutsche Bank

Good. I am just – I wanted to – you know there is lot of puts and takes with the machining business being up so strongly this quarter. So thank you for the detail on that. If I try to strip that out it looks like the core capacitor business was up about 3.6% in the June quarter and I am just trying to understand for the September quarter what would you expect revenue in that segment to be and how would you expect the capacitor segment of the business to be trending? It looks like guidance might be about flat for capacitors for September, but just want to get a sense?

Per Loof

Let me start and Bill can fill you in on some more details. The machining business will drop some in the quarter and will be below 20, probably in the $18 million, $19 million range. And, you know, I think that there will be some summer slowdown with the component business as well, which is difficult. Bill, you may want to add colors to that?

Bill Lowe

I think that you will see – you will see the pull backs comes from machine and then in components. Again, you got – in Japan we had a pickup as we expected and came in about right the number we did expect around $7 million as Per said. That’s not going to repeat. So nevertheless, that’s component business. That’s not machining business. So you have got that impact as well. So you – generally you are going to see a drop in component business in September and some machining of that total drop.

Per Loof

You are right. You are right range for what components did probably for the quarter when you back out machine.

Sherri Scribner – Deutsche Bank

Okay. So both machining and components to be down –

Per Loof

They will both come back, come down but a bit in September, yes.

Sherri Scribner – Deutsche Bank

And then just thinking about the inventory adjustment that were seen related to Japan, how long do you expect that to work itself through? I think you’ve also mentioned that inventories were a bit higher in the distributing channel. Do you expect that all to sort of flush out by December?

Per Loof

I think we are going to see a flush out maybe even sooner than December, would be my expectation.

Sherri Scribner – Deutsche Bank

So, flush out during –

Per Loof

I mean most of – a lot of it will be flushed out this quarter and then early next quarter and then I think it will be done.

Sherri Scribner – Deutsche Bank

Okay. And then just quickly on the acquisition, how much did the new foil business add to revenue this quarter? Was it substantial?

Per Loof

Zero. We purchased in the last couple of weeks of the quarter. So you know you got just a slightly less than two weeks. So really it has not been in the income statement.

Bill Lowe

They are on the balance sheet…

Per Loof

…on the balance sheet, but not on the income statement.

Sherri Scribner – Deutsche Bank

And would you expect it to add to revenue in the second quarter?

Per Loof

It will add a little bit.

Bill Lowe

It will a little bit, not significantly.

Sherri Scribner – Deutsche Bank

And would that be an F&E also or –

Per Loof

It will be included in the F&E business segment, yes.

Sherri Scribner – Deutsche Bank

Okay. Great. Thank you.

Operator

Your next question comes from Hamed Khorsand with BWS Financial.

Hamed Khorsand – BWS Financial

Hi. Good morning. Just a few questions here. On the tantalum side of the business it seems like the industry utilization is still above 90%. So how much business are you losing to competitors because of not being able to have access to production capacity?

Per Loof

You know, my dear friends may have a different view than I, but we are seeing our share increasing. So, we are seeing our market share holding – or slightly going up. So we are not losing business to that condition.

Hamed Khorsand – BWS Financial

Okay. And then if you are seeing pricing decline from here what happens to selling prices given where your utilization rates are?

Per Loof

Well, I would imagine that if we can – if we can – if we can cut our cost structure or get the ore at cheaper prices, we will share that with our customers, of course.

Hamed Khorsand – BWS Financial

Okay. So there is no real benefit of bottom line from gross margin standpoint?

Per Loof

There is a benefit, but I mean – it’s not going to be all KEMET, of course. I mean, some of it will, but it will be a benefit to the bottom line for sure. But it will also benefit the competitiveness of the tantalum products.

Hamed Khorsand – BWS Financial

Okay. And then my last question is Europe related. Given the seasonality you do see in the summer months, is there anything from a geopolitical standpoint that you are seeing affecting the order trends?

Per Loof

That’s almost impossible to answer. But clearly, we don’t have – Greece is not a big market for us, let’s put it that way. Clearly we are more focused in the northern – in the northern part of Europe and then in Italy. It’s really difficult to ascertain whether any of the current debt conversations regarding the, you know, the whether it would be Ireland or Portugal or Greece or Italy or Spain are affecting our business.

We don’t – we would kind of say it doesn’t, but of course, in the end it could affect consumer demand and thus demand could be slowed down on a general basis. So I am not saying that it won’t have any effect, but I think it seems like they have done the adult thing in Europe to rein in this issue and then you’ve got to get started on a new beginning. So we don’t think that’s going to affect our business going forward in Europe.

Hamed Khorsand – BWS Financial

So what I am trying to understand what’s making it more seasonal than last year?

Per Loof

You know, last year we came out of the deepest recession since the great depression, right. And we were still reining in – we were still sort of working our way towards filling demand that came back very, very strongly. But in you compare our Q – this September quarter of last year which was at $248 million, you know, we are still going to see, as Bill said, growth relative to that.

And I think, you know, the other situation is because of Japan not only did we get additional business, but I think the distribution channel in particular added some additional products on their shelves to protect against further issues, you know, stemming from that catastrophe. We do believe that the Japan issue from a product supply perspective is pretty much over at this point.

Hamed Khorsand – BWS Financial

Okay. Great. Thanks.

Per Loof

– much quicker and much faster than any of us would have expected.

Hamed Khorsand – BWS Financial

All right. Thank you.

Per Loof

Thank you.

Operator

The next question comes from Amit Passi of UBS.

Amit Passi – UBS

Hi. Thank you. Bill, first question for you. I heard revenue guidance for the September quarter, I believe you said plus 6% to 9% year-over-year, but I didn’t get any clarity on your expectations for margins or maybe just an EPS guidance for next quarter. I wonder if you could maybe shed some light there.

Bill Lowe

What I said in regards to margins was there are a few things that will impact margins compared to this quarter. If something effects that we shut down facilities in the summer months and a change in mix is what I basically said would also have an impact on the margins.

So and then again, I am not giving you a percentage but said it would look similar to the March quarter but with higher potential for revenue for the September quarter.

Amit Passi – UBS

Okay.

Per Loof

When you run that percentage against last year’s – last number’s number that’s what you will get a little higher revenue over March and a similar looking rest of the income statement.

Bill Lowe

And if you go back and look at history and what was normal when we thought there were normal times, calendar Q1 and calendar Q3 were sort of similarrish from a KEMET’s perspective.

Per Loof

If you had – there was another question you asked me and I didn’t answer, I don’t think you have asked about debt margins and there was a third – was it – ?

Amit Passi – UBS

Well, I think that helps. I was just looking for clarity on either margins or core EPS for the quarter. So I think the fact that you gave one we came back into the other, so that helps.

And then just on F&E, is there any way to give us a sense that if you were to back out the benefit from higher machining orders like what was the underlying improvement from your restructuring initiatives in F&E because I think you said operating margin was 11.6%, I don’t have a figure for March but it looks like December you are running kind of mid-single digits. So I am just trying to isolate sort of the underlying improvement in F&E?

Per Loof

I think what we’ve said and we said this last quarter and will probably say it each quarter this – most of this fiscal year is that the next change is in – primarily changes in the benefits or new benefits from restructuring really comes at the end of our fiscal year and the first quarter of the next fiscal year. As we take steps to complete our final moves of equipment and facility closures that we already announced.

And so it’s kind of flat during the first part of this fiscal year and we said that on the last call. So incrementally quarter-to-quarter, there really isn’t improvement. It will come in as we said last quarter in more of a step change event when those actions are taken. You know, phase one of our restructuring effort is by now complete. And, you know, phase two will kick in, but it’s going to take a couple of quarters – a couple of three quarters before we see any, you know, impact on the bottom line.

Bill Lowe

So I think that – I think I told you I think on the last call that – it’s hard for you to model because you can’t model it in a linear fashion, but there will be an impact as we get into the fourth fiscal quarter and the first fiscal quarter of next year, but not incrementally quarter-to-quarter in the first three quarters of this year.

Amit Passi – UBS

Got it. And then just my final question, looking at the tantalum business, I think you have now had about four quarters where revenues kind of in the $123 million to $125 million range. We have seen operating margin grow from 22% to 14%. I was just trying to understand like when do we start to expect some recovery margins or is sort of 14% the right level to think about margins at the current revenue level?

Per Loof

Yes. Are you talking about (inaudible).

Amit Passi – UBS

Tantalum.

Bill Lowe

You know I think we have seen – we have seen the impact of tantalum raw material costs impact the business and I think that’s going to remain for some time. I think, as you know, the initiative that we have started by trying to sponsor tantalum ore coming out of the DRC and then going to the smelters, I think, will impact the cost of raw material in the long haul in a positive manner and that, of course, will have a positive impact for us and also our competitors. And, you know, for your customers as well.

So it’s a win-win for everybody and I would like to say that the initiative we are taking is not a KEMET only initiative. It’s really to try and open up the country so that – for everybody’s benefit, the Congo at least, of course, but also the entire industry.

Amit Passi – UBS

Thank you. Good luck.

Per Loof

Thank you.

Operator

(Operator Instructions). Your next question comes from Marco Rodriguez of Stonegate Securities.

Per Loof

Hi, Marco.

Marco Rodriguez – Stonegate Securities

Hi. Good morning. Thank you for taking my question. I was wondering if you could give us a little more sense in regard to the vertical integration strategy. Obviously you made the Dubilier [ph] Foil acquisition, can you give us sort of a sense of the expected savings you will see there?

Bill Lowe

You know, it’s a little early to – I mean there will be some savings from the vertical integration that we – the Foil facility that we have acquired. It’s going to take some time to make – to have that work its way in because, you know, there is qualification time because of some pretty complex products. So it’s going to take some time to do that. So, that’s going to fill in over the year and then have more of a full impact in the next fiscal.

In terms of the other initiative in the DRC that we hope will bear fruit, that’s going to take even longer to have an impact on – have a significant inside on the results. But I think we hope as I said, to start that initiative in September once all of the certifications are complete and as we move that industry forward we are going to see the results coming in starting next year, it will be my guess.

Marco Rodriguez – Stonegate Securities

Obviously, you’ll likely be sharing some of the benefits that you obtain from these different strategies here. Can you give us any, sort of, sense of how much you might be able to capture for yourself and how much you may need to share with them?

Per Loof

Yeah. Its way – was way too early at the point.

Marco Rodriguez – Stonegate Securities

Okay. And then lastly just kind of a follow-up in regard to the capacity utilization levels by business segment, can you give us, sort of, a sense of how do you see that trending for the remainder of year?

Per Loof

We continue to see utilization to be high and we gave you the numbers for this quarter. And utilization is going be a little off this quarter because we actually – not only our customers shutting plants down we are also shutting plants down. The typical plant shutdown in Europe for us is about two weeks. So if we take two weeks out of 13 that’s not insignificant, of course. But I think, we are adding capacity where we think we need to and we are continuously working lean initiatives and other yield improvement initiatives to ensure that we can get more out of the equipment we have.

Marco Rodriguez – Stonegate Securities

One last quick question. You had some really strong ASP growth rates over the last few quarters in all three respective segments. Can you give us a little bit of sense of how are you seeing that pricing trend going forward?

Per Loof

We see pricing holding at this point. And then, so we will – we’ll have to see how that works its right through the season which the negotiation season for us starts pretty soon, but so far we believe that prices are holding.

Marco Rodriguez – Stonegate Securities

Great. Thank you, guys.

Per Loof

Thank you.

Bill Lowe

Thank you.

Operator

Your next question comes from Tony Kure of Keybanc.

Bill Lowe

Hi, Tony, good morning.

Per Loof

Good morning, Tony.

Tony Kure – Keybanc

Hi, guys, how are you?

Per Loof

Good.

Tony Kure – Keybanc

Good. Just couple of things, just wanted to talk about during the quarter just looking around the pricing and raw material dynamic, do you think there was – the pricing was a net positive or actually the net negative spread on the price cost during this current quarter – this past quarter?

Per Loof

Are you talking about raw material pricing or in term of ASP pricing?

Tony Kure – Keybanc

Raw materials – through the raw material.

Per Loof

Raw material is still affecting the tantalum business negatively. I mean, as if we think they have peaked but I think they peaked during – only full effect of the price increases or the cost increases came this quarter.

Tony Kure – Keybanc

And is that, sort of, factored into your expectations for the upcoming quarter that we are in that that will continue to affect you?

Per Loof

Yes, yes.

Bill Lowe

Okay.

Tony Kure – Keybanc

Okay. And then as far as the European shutdowns, we been hearing some things about European exports pretty good out of the auto world there and there is a chance maybe that there could be less of a shutdown or maybe no shutdowns. I just wanted to get your take on that given how – I mean I know it sounds counter intuitive, but it seems like things are going relatively well in the high-end auto section, any thoughts there?

Bill Lowe

I think, we are hearing that some of these plants won't be shut down. But there is an effect on customer side, but there was an effect on our side. So we are actually shutting down several of our plants. One, some were shutting down a week and some are shutting down two weeks. And I think the shutdowns, in the past of course, it was shut down a month and, of course, we don't see that any more. So people are working through the vacation period in a different manner. But I still think there will be some slowdown and people still are taking vacation during July and August and particularly in the North, July is the big month and in the South, August is the big month.

Tony Kure – Keybanc

Okay. And then if you could just humor me, I didn't quite catch all of the operating income as a percentage of sales by segment. Could you just review those quickly?

Per Loof

Sure. The operating income of tantalum was 14.3, I believe. And the operating income for ceramics was 19. And the operating income for Film and Electrolytic was 11.6. I don't have the sheet in front of me but I think that are the numbers.

Tony Kure – Keybanc

Okay.

Per Loof

Keep that check-in.

Bill Lowe

Yeah. Was that – did I remember correctly?

Tony Kure – Keybanc

Yes.

Per Loof

Yeah. Almost.

Bill Lowe

Close. Very close. Operating income in tantalum was 17.4.

Per Loof

No, no.

Bill Lowe

(inaudible)

Per Loof

That’s a million, $17.4 million.

Bill Lowe

14.2%.

Per Loof

14.2%. That's correct.

Tony Kure – Keybanc

Okay. 14.2%. Okay. And then just…

Per Loof

That’s 18.3, sorry.

Bill Lowe

Yes.

Per Loof

I miss by a percent. And Film and Electrolytics 11.6.

Tony Kure – Keybanc

Okay. Thank you. And then, just to confirm the expectations was for to be looking like the March 2011 quarter. Did I hear that correctly?

Per Loof

That’s a higher potential in revenue slide, let me round the numbers over 6% to 9% over year-over-year when you get a little higher revenue than March, so, yeah, we are thinking we will look some of that with potential for a little higher revenue than March.

Tony Kure – Keybanc

Okay. Great. Thank you.

Per Loof

Thank you.

Operator

Your next question from Ana Goshko of Bank of America.

Ana Goshko – Bank of America

Hey. Thanks for taking the question. Just back of the afternoon restructuring, I think you initially set a goal of achieving $48 million of cost cuts from it and just wanted to know if that still that zip code. How much of that is actually already reflected in this quarter's results?

Per Loof

I think that’s still the zip code from the restructuring. I think we’re actually getting a bit more than we had – than we had hoped but, so that’s a net positive. But I think so far I think we have seen maybe 40% of that or so would be maybe even less than that.

Bill Lowe

I think a little more – unlikely, I think we were saying that when we get done through this fiscal year, next fiscal year there’s probably another $3 million a quarter – $2 to $3 million a quarter that could be a benefit with the remainder or with the balance already captured by the time we get to that point.

Ana Goshko – Bank of America

Okay. And then the facility in Macedonia is that a departure, are you still moving most of the existing production lines to Mexico and that’s something that’s additive or was that sort a change in strategy where you want to keep your production line?

Per Loof

It’s – we always had a strategy, we want to produce in the region about getting the products. So we want Mexico to be the main hub for Americas. It is actually doing a bit more than that. And we want, our facilities in Indonesia and China to support the Asian markets and we want to find low cost locations or best price locations, best cost locations in Europe where we can do that. As you may know we do have such a facility in western Bulgaria and this facility is actually from a proximity perspective very close to the Bulgarian facility and is in a best class from a cost perspective. And the cost of doing the business in Macedonia is similar to either China or Mexico. So it is not a departure.

Ana Goshko – Bank of America

Okay. And then, there was supposed to be about $30 million in cash costs related to the restructuring. How much of that is actually already been paid out?

Per Loof

It was probably over the – we spend an average of $1 million to $2 million a quarter just on relocating equipment. We have been doing this now for awhile. So we probably spent in total counting severance to-date somewhere around 20 of the 30. There is also some capital funds that gets spent as well on top of that that will get spent this year for – that is in the capital budget, that is probably another $7 million or $8 million of capital, I am not counting the Macedonia.

Bill Lowe

I mean you can look at Macedonia as a restructuring but it really isn't. It is more of ensuring that we have the capability in Europe to support our customer base.

Ana Goshko – Bank of America

Okay. So that $20 million is cash disbursed, it is not just the charges were taken.

Per Loof

No, no, no. It’s real, whether that real – when we have relocation or the expenses we have for relocation is cash that is a period cost. The only time that we have accruals is when we pass – we would announce some type of severance charge that we are not taking until some from a cash perspective and not releasing for a future date. We have had one of those but that cash has already been spent. And then, so the average of, $1 million to $2 million quarters we will cash to put, dismantle equipment put it on a boat, ship it, reassemble it, et cetera.

Ana Goshko – Bank of America

Okay. And then final question. On the two and a quarter percent converts, the $41 million outstanding, there is a put call coming up in the fall and I know from an accounting standpoint you have been treating them as short term. But what do you expect is going to happen? I mean, did you – had you expect them to be put on in or if they are not would you call them?

Per Loof

Well, we have the required to actually notify the holders that there is a put coming up we will do that in September as required. I would expect that the larger holders of those notes would probably put them to us. They are planning for that, that’s what we have been saying that. However, on the other hand if they don't, the next window is about five years from now the 2.25% I think the company would be happy to leave the money where it is.

Ana Goshko – Bank of America

Okay. Great. Okay. Thank you very much.

Operator

Your next question comes from Tony Venturino of Federated Advisors.

Tony Venturino – Federated Advisors

Good morning. Thanks for taking my call.

Per Loof

Good morning.

Tony Venturino – Federated Advisors

Just a couple of quick questions on cash flow, if I could. First of all, CapEx you did $5 million to $6 million in the quarter and I think you reiterated the $55 million to $60 million. Is that going to ramp literally through the rest of the year or is it going to have big chunks.

Per Loof

Yeah. It is going to ramp, I think probably you will see the majority of it in the latter two quarters versus a huge chunk in the next quarter but there will be some more in the next quarter and then the third and fourth quarter probably you will see a majority of it.

Tony Venturino – Federated Advisors

Okay. Is there any chance, I guess how confident are you that that number is going to be in this fiscal year versus…

Per Loof

I think the very large portion of it will be. I mean our plans with time you approve the projects and you do the POs and start getting things going from an actual spin standpoint it doesn't happen the very next day. So we have a lot of things we need to do and I do expect we will see the majority of that budget this year.

Bill Lowe

If you take this corporate facility, I mean we are already building, I mean we had construction folks on site...

Per Loof

And it’s also getting (inaudible) is the Macedonia facility, so.

Tony Venturino – Federated Advisors

Sorry, was that five or…

Per Loof

So we said this in the press release, actually on Macedonia, $5 million to $7 million of it is in this fiscal year.

Tony Venturino – Federated Advisors

Okay.

Bill Lowe

It’s in the capital plan of $55 million to $60 million.

Tony Venturino – Federated Advisors

Okay. And then when I look at working capital you did – used $40 million this quarter which was slightly above last year but when I look at the full year number for last year you used about $40 million for the year and as you said earlier you were kind of ramping out of the lows of the recession. I'm just curious kind of what you think it might do this year?

Per Loof

I think from wherever we are at today, I think you will see working capital decline from where we are at today. There was a large increase in inventories this particular quarter-over-quarter. And our goal, as I mentioned was to get our working capital back in line, primarily inventories, receivables and payables are in good shape. Inventory is a little high and over the next coming quarters we will – I would expect to see a decline in our inventory balance over the next six months.

Tony Venturino – Federated Advisors

Would you still expect a use this year but less of a use than last year?

Per Loof

Yes.

Tony Venturino – Federated Advisors

Okay. Fair enough. Thank you very much.

Operator

(Operator Instructions). Your next question comes from Matt Sheerin of Stifel Nicolaus.

Per Loof

Hi, Matt.

Bill Lowe

Hi, Matt.

Matt Sheerin – Stifel Nicolaus

Yes. Hi, good morning, guys. Just a question on you talked about distribution inventory correction. Could you tell us what percentage of revenue distribution represented in the June quarter versus the March quarter?

Per Loof

Yeah. I can tell you exactly what that is. The distribution channel, if I add, if I combined this in ODMs, it was 46% in the quarter and ODM, the true distribution is like is – it is really 41, but the real number is 46% with distribution.

Matt Sheerin – Stifel Nicolaus

Did that grow greater sequentially than the overall business?

Per Loof

Nope, nope.

Matt Sheerin – Stifel Nicolaus

Though, was in line, okay.

Per Loof

Should, it’s likely.

Matt Sheerin – Stifel Nicolaus

And then you talked about, it sounds like distribution orders are weak. Do you get a sense, is that going to be sort of a one quarter phenomenon or would you expect to see that softness in the channel continue into the December quarter?

Per Loof

You know, let me put it this way. We are not seeing that in the OEM and the MS channels. So that leads me to believe that I think the Vista [ph] channel overcorrected for the Japanese situation among others and they are going to have to, leave that through and that is – so I think it going to take maybe be a quarter and a half to get through that it would be my estimation at this point.

Matt Sheerin – Stifel Nicolaus

Okay. And then I know people have asked this question just around your guidance, you said that September revenue would be a little bit above March but the rest, kind of, line with March. So does that assume them that gross margin is sort of, back to the kind of 24% range?

Per Loof

Yeah. I said there was – I didn't give a number but I said that there would be the indicators that would push the number down from where it is today, certain factors related into that.

Matt Sheerin – Stifel Nicolaus

Okay. And it sounds like your ASPs have been stable. I know you had some price increases. How do you characterize that environment given the correction that you are seeing in orders would you expect to see a normal, return to normal price erosion?

Per Loof

Well, we haven't seen it. So we’re seeing, we're not seeing the prices going up but we are seeing prices holding.

Matt Sheerin – Stifel Nicolaus

And do you think that is sustainable?

Per Loof

I think it is sustainable for some time, but I don't – overtime, of course, we are going to enjoy, greater efficiencies and of course, customers will expect us to share some of that with them. And we clearly expect to do that as well. So it is one should say with history and in view, one should say that, of course, prices will move back to some sort of normal pattern but at this point we are seeing prices being sustainable.

Bill Lowe

Got you. Okay. Thanks a lot.

Per Loof

Thanks, Matt.

Bill Lowe

Thanks, Matt.

Operator

And there are no further questions.

Per Loof

Okay. If there are no further questions, we do appreciate you being on the call. We appreciate your support of the company and we wish you all a great day. Thank you very much.

Bill Lowe

Thank you.

Operator

Thank you. This concludes KEMET's first quarter earnings release conference call. You may now disconnect.

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Andersons (ANDE): Q2 EPS of $2.42 beats by $0.70. Revenue of $1.3B (+65% Y/Y) beats by $0.15B. Shares +7.1% AH. (PR)