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KEMET Corporation (NYSE:KEM)

F2Q2012 (Qtr End 09/30/2011) Earnings Call

October 27, 2011 09:00 am ET

Executives

Dean Dimke - Director, Corporate Investor Communications

Per Loof - CEO & Director

Bill Lowe - EVP & CFO

Analysts

Sherri Scribner - Deutsche Bank

Amit Passi - UBS

Hamed Khorsand - BWS Financial

Tony Kure - KeyBanc

Marco Rodriguez - Stonegate Securities

Matt Sheerin - Stifel Nicolaus

Dean Dimke

This is Dean Dimke, Director of Corporate Investor Communications. Good morning. And welcome to KEMET’s conference call to discuss our financial results for second quarter ending September 30 fiscal year 2012.

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

As a reminder to you, our presentation is available on our website that should help you follow along with the financial portion of our presentation this morning. Please go to kemet.com and click on the Investor Relations tab in the top right portion of our homepage. Once there, please click on the second 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 future and 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 statements, 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. With all the noise of economic issues that had been occurring during the quarter, we’re pleased that we had a solid quarter, revenue coming in at $265 million in line with our forecast. Non-GAAP operating income was $30.2 million or 11.4% of sales and non-GAAP diluted EPS was $0.43. Additionally, we had continued strong top and bottom line performance across all business groups.

As we entered the month of October, the beginning of our third fiscal quarter, we anticipated that an inventory correction would talk place in our distribution channel over the course of both, the third and the fourth fiscal quarter ending in March.

Distribution channels are addressing their inventory position after significant build brought on by the incredibly strong rebound over the last year and a half and the un-anticipated effect of the earthquake in Japan earlier this year, which caused some customers to overbuild their inventories fearing that they may not be able to obtain parts.

While the Thailand floods occurring as we speak have not affected KEMET’s manufacturing facilities nor to our current knowledge or any of our direct suppliers having delivery issues as a result of the floods, the disaster does had complications to our ability to accurately forecast the next couple of quarters.

Early indications are that a significant portion of capacitor production is going offline as a result of flooding and we intend to be supportive of those companies affected by the disaster. We’re preparing our operations to fill in the supply gap for the production affected and we believe that this situation may counter balance both the inventory corrections and softening demand. It is too early to know how all this plays out but we are expecting demand to increase and that there maybe possible shortages of selective products in the world as we move forward into the next calendar year.

We continue to focus on our long-term strategies, which include remaining focused on growth, maintaining our cost reductions and seizing upon opportunities as they are presented.

As discussed in our last call, one area that holds great opportunity is the vertical integration of our operations to better control sources of raw material supply in our cost structure.

At the end of the first quarter we took the opportunity to acquire Cornell Dubilier Foil, a Tennessee based process of aluminum foils, utilized as a core component in the manufacture of aluminum electrolytic capacitors. This state-of-the art Foil facility is one of the largest of its kind in North America.

We’re pleased to report that this time the Foil operations have been fully integrated into our business. The facility has been running smoothly and customers are pleased with the seamless transition.

We continue to actively look for more of these opportunities such as this one. With regards to our efforts on our putting Africa back to work, we’re pleased to say we’re involved with the Organization For Economy Corporation And Development, OECD, due diligence product program related to responsible sourcing of conflict materials in the DRC and Central Africa.

The program is intended to assist with the implementation of the OECD guidance and its supplement on tin, tantalum and tungsten as well as sharing information on practices tools and methodologies for performing due diligence.

As the global leader in the processing of tantalum, we’re committed to the responsible use of this key raw material as well as stability of supply.

Last quarter we announced our plans to construct a new manufacturing facility in Skopje, Macedonia. This facility is a component of our long-term strategy of consolidating and maintaining manufacturing for operation of customer base while fulfilling our objective of lowering the cost structure associated with our Film and Electrolytic business. We have broken ground and construction is well underway. The expected completion date of this facility is summer of 2012. The investment in this facility including transferred asset is expected to be approximately €12 million. Before I go into detail regarding the performance of our individual business groups and regions, I will turn it over to Bill Lowe to review our financials for the last quarter. Bill?

Bill Lowe

Thanks Per and I will begin my review on slide 3 if you happen to be following along on the slide deck that’s on the website and that will be income statement highlights.

Net sales of $265.5 million which lands in the top of our forecast range for the quarter were up 6.1% over last year’s same quarter of $248.6 million in sales. Our SG&A expenses were $28.4 million, about $2 million lower than the previous quarter and running about 10.7% of sales.

Looking forward to next quarter, our expectation is that SG&A expense should be in the range of between $24 million and $25 million. Our GAAP net income was $14.3 million or $0.32 per basic share and $0.27 per diluted share for the quarter.

On slide 4 now, our non-GAAP adjusted net income was $22.4 million or $0.50 per basic share and $0.43 per diluted share for the quarter. And our adjusted EBITDA was $42.1 million for the quarter, down from $56.3 million in the June quarter.

On slide 5 our non-GAAP gross margin as a percentage of sales decreased to 23.5% compared to 27.5% in the prior quarter. This decline was expected and was forecasted during our previous call and also when we recently confirmed our guidance for the quarter.

Now if we can turn to slide 8 for the balance sheet. We generated $45.7 million of cash flow from operations this quarter and we ended the quarter with cash including short-term restricted cash of $163.7 million. Of this amount, approximately $37 million is restricted and we will use it to fund the purchase of the convertible notes this next month in November.

This will reduce our overall debt leaving approximately $234 million of total debt with $230 million of that due in 2018. Inventories declined approximately $16 million during the quarter which is in line with our statements during our last earnings call that we would see a decrease in inventory balances by the end of September.

Our receivable DSO was 39 days and our payable DSO was 34 days. Capital expenditures during the quarter were $14.4 million and are $20.1 million for the fiscal year-to-date. As a reminder, we did forecast capital expenditures for the entire fiscal year to be between $55 million and $60 million.

And to note, our bank revolver continues to remain undrawn at this time. Looking out to the next quarter which ends December the 31st, we see revenue down approximately 10% to 14% compared to September quarter and gross margins in the range of between 19% and 22%. As Per mentioned earlier, the major driver for this change is primarily volume and the mix, but driven almost exclusively by the inventory adjustments going on in the distribution channels.

As Per also said earlier, what clouds our forecast are the events occurring in Thailand and the uncertainly surrounding the unfortunate economic disaster that will affect many industries in the months to come. We are working to fill the pipeline and support those companies affected by the situation and our ramping up the operations to fill the supply gap.

The financial impact and possibly a benefit of this on our operations during this quarter which ends in December is unknown at this time and with that I will turn the call back to Per.

Per Loof

Thank you, Bill. Let’s take a look at our business results by the three businesses, Ceramics, Tantalum and Film and Electrolytic, as well as the sales regions Americas, Europe and Asia. I’ll start with Film and Electrolytics.

Revenue this quarter was $97.1 million, down approximately 10% compared to Q1. The decrease in revenue was driven by an expected pullback in machine revenue which was at record levels in Q1 as well as a softening of the components’ business associated with the summer slowdown in Europe.

Adjusted gross margins were solid at 18.3% and in line with expectations on lower revenue as focus on cost initiatives, product mix and pricing optimization continue to take effect. Adjusted operating income as a percentage of net sales was 6.5% for the quarter and again in line with our expectations given the normal pullback in revenue in the December quarter.

The new order rate declined by 28% in Q2 versus Q1 driving the book-to-bill negative as the overall market cooled down from the peak earlier in the year driven by supply uncertainty in Japan. Backlog however remains at historically high levels has declined somewhat with the pullback in the orders. Our Ceramic business in Q2 was down by 5.5% over the previous quarter to $56.1 million due to channel inventory correction resulting from Q1 supply concerns and subsequent overstocking associated with the Japanese tsunami.

The revenue decline was isolated to our commercial business. Our specialty product business continued to grow quarter over quarter. Q2 adjusted gross margin on adjusted operating income as a percent of net sales both fairly strong at 32.8% and 20.3% respectively as progress continued on product mix optimization and manufacturing cost initiatives. The Q2 book-to-bill was 0.87 and backlog was down slightly driven by continued channel inventory adjustments in the commercial product segment. Capacity utilization for Q2 remained stable at approximately 73%.

On the Tantalum side of the business we ended Q2 at $112.3 million, down from the previous quarter at $122.4 million. Adjusted gross margin as a percent of net sales was 23.8% and adjusted operating income as a percentage of net sales was 11%. OEM customer demand remains mostly sound, however, higher than desired inventory levels in the distribution channel have resulted in lower than normal order rates. These inventorial levels will allow distributors to respond to customer needs quickly thus returning the order rate reflected more true demand. Until this happens however, our book-to-bill ratio will remain below one-to-one.

Regionally, in the Asia-Pacific region, component sales for Q2 was $78 million, a drop of 15% over Q1. The market has softened in Asia beginning in July because of three reasons. First, real demand dropped for both MS and OEM because of the decreased demand from the end customers. Second, the excess inventory in pipeline distribution and third, consumer market low-end mobile phones and PCs facing soft demand, only the tablet and smartphone businesses are strong.

Moving forward to Q3, we expect that the market will remain soft for the consumer low-end mobile and data processing market segments. Automotive, industrial and green energy demand is still flat to soft. Telecom, however, should be strong in Q3.

The European market held up well in Q2 with component revenues coming in at a $106.9 million, slightly down from Q1 by 2%. These are impressive results considering Q2 contains the European vacation periods.

Major markets such as automotive and telecom held up well, but solar and renewable energies again showed signs of weakness due to the project delays and push-ups partially as a result of uncertainties being eliminated.

Book-to-bill ratios were negative throughout the quarter, driven by the distribution channel which is now undergoing an inventory correction as we’ve been speaking about and aligning inventory due to industry-wide reductions of lead times. On the plus side, the book-to-bill ratio for the OEM channel in Q2 remained positive.

Looking forward to Q3 for Europe, we expect the challenging quarter again this will be driven by the inventory correction in the distribution channel. Revenue in the Americas region decreased 12.2% in Q2 to $81.6 million driven by demand from transportation, industrial, telecommunications and commercial aerospace segments.

During the quarter, bookings began to soften as lead times reduced and inventory began to build. We ended Q2 with a negative book-to-bill ratio of 84 and our current book-to-build had slightly improved to negative point 94.

From the segment component perspective, this past quarter we had a mixed situation, military and medical which in total accounted for 10% revenues came in slightly below last quarter on a revenue basis. Telecom at 20% was also down a bit compared with Q1 while both consumer and computer at 15% and 10% respectively were about the same on a percentage basis, but down revenue wise. Transportation at 18% of revenues increased slightly on a percentage basis and was about revenue neutral with the previous quarter. While industrial at 27% was down in both measures.

On an overall market perspective going forward we expect to see more changes in segment demand trends than in the previous two quarters where the trends have been fairly steady.

Transportation paced by automotive demand and continued growth in electronic content should remain solid. In addition, military and medical market should remain stable. Telecom infrastructure demand will weaken somewhat even though broadband demand remain strong as operators try and make the most out of the install capacity.

Well we believe the base line underlying demand in the industrial segment remains stable. Recent cuts in incentives and funding for sustainable energy applications both in advance in emerging economies negatively impact near-term demand. And the consumer and computer segments will soften as consumers are not expected to freely open their wallets this Holiday Season. That said, the computer segment associated with the server for cloud computing applications remains a bright spot.

We also expect booking this quarter is low from Q2 as our distribution partners draw down their inventory they build during the period of extended lead times and unrealized expectations from the Japan disaster. However our analysis of the EMS channel shows a rather lien inventory situations which will minimize the downside impact from these channels.

We are pleased with the results we are seeing from the implementation of our long-term strategies. And we’ll have to recognize the efforts the global KEMET team has made to deliver these results. And this concludes our prepared comments and we’ll be happy to respond to any of your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Per Loof

Before that, let me just say this I think I said, my colleagues told me I said the revenue in Americas was down 12%, it was actually up 12%. So I apologize for that. You can correct your numbers there, correct again.

Operator

Your next question comes from the line of Sheri Scribner of Deutsche Bank

Sherri Scribner - Deutsche Bank

Hi, guys how are you? I am sorry what was up 12% versus down 12%?

Per Loof

The Americas region was up 12%. I am sorry in Q2 to $81.6 million, so that’s up versus the down.

Sherri Scribner - Deutsche Bank

Okay great. And then Bill, if I can just ask you about the operating margins, here I think that you commented that the channel margins were 11% this quarter which is down pretty significantly from the past couple of quarters. I just want to make sure that I have that right and then can you help us understand what you are thinking about for margins in each of the segments and tantalum in particular as we move forward?

Bill Lowe

You’re correct. Let me start there, yeah we had our operating income margin for tantalum was 11%, down little bit from previous quarters and I guess, we see the continued increase in material cost that’s affecting that business. That was all anticipated and as we go forward we may see continued pressure on that segment going forward. So, that’s concludes why what we are trying to do and with our African initiative is so important that we can actually not only make sure that Africa comes back to work but also that we can actually ensure that we have a supply chain that is actually cost effective for us.

Sherri Scribner - Deutsche Bank

Okay. So just thinking about the margins as we move forward, it sounds like you are expecting tantalum margins to be down again and the other margins, would you also expect them to be down?

Bill Lowe

Just slightly. I think the bigger movement is in the Tantalum group. You might see some slight because there is inventory correction happening in the ceramics area as well. You will see a little bit there but not a lot.

Per Loof

There is also a product mix situation we shouldn’t forget. The fact that the inventory correction is taking place in the distribution channel and that’s typically in the Americas and Europe, and margins in those channels and in those regions are typically higher. So there is a product mix that plays into this as well. So it’s not just the effect of the costs are increasing but the mix will affect the margin as well.

Sherri Scribner - Deutsche Bank

Okay, that’s helpful. And then seeing about the inventory correction, I know, you talked about it and you mentioned another couple of quarters, is that still your view or does Thailand, sort of, change that how long it will continue?

Per Loof

I mean if you look at what’s happening, I mean in Thailand, and let me just give you a few, I mean, and you see [Toaken] have confirmed that the plant is flooded and have closed, ROHM same thing, and then Western Digital have some plants that are not workable at this point and so forth. (inaudible) facilities close, [Sani] Semiconductor is closed. So there's a lot of things going on in Thailand. And of course this is only really been going on for a week or so. So it’s a little early to really, totally understand what is happening here but we think that the current situation and the course of the fact that this is water, and water and electronic manufacturing don't mix really well. We think that that could have an impact for several months to come, maybe over several quarters and while we are flagging for here is the fact that the inventory correction that is happening and it is happening, of course, may be a little shorter as a result of this situation and also directly we have said that we are willing to help support companies that have come into this situation and that may have an impact on the positive side for KEMET.

Operator

The next question comes from the line of Amit Passi from UBS.

Amit Passi - UBS

Just a clarification, can you give us some sense of what proportion of the supply, you think, is coming offline due to the situation in Thailand. I mean we've heard something like maybe 90% of NSC's production has been impacted, maybe you could just help us quantify that.

Per Loof

I mean I am not going to comment on any specific companies but it’s clear that both NSC and ROHM have significant capacitor operations in Thailand and they have both confirmed that their plans are offline at the moment. What I believe is that they haven't even been able to get back into the facilities at this point because of the water situation. I think these are all off limits. So it’s a little early to completely ascertain how effective they will be but there could be, you know, some issues for some time and we have said publicly that we are willing to support these companies that are affected and if asked, we will.

Amit Passi - UBS

Got it and then I apologize, Per, if you talked about this but post the Japan situation, as production came back on line in Japan, did you see any sort of unusual pricing activity in your ceramic business, again I apologize if you touched on that.

Per Loof

No, we didn’t touch on that. No, we didn’t really. We saw our pricing holding, we didn’t see any particular strain on the pricing. So it came back and it came back where it had been. But the difference, in my view of the Japanese and the Thai situation and this is just my view, Japanese disaster was horrendous from a human perspective and the human tolls were horrific, 20,000 deaths or so. But -- from an industrial perspective, the business came back very quickly much quicker than I think all of us anticipated. I think the situation in Thailand is almost a reverse. The human toll is much smaller, in the 300 to 400, which is of course horrible, but compared to the Japanese situation, not as large. But what we hear is that there are thousand plants underwater at this time. And 483 of those from Japan, the Japanese companies of various sorts. And so we may have a situation that is completely opposite here.

Amit Passi - UBS

Got it and just one final for me, Bill, if I look at the guidance for next quarter, I think it looks like operating margins will come around 6%, 7%. How should we think about outside of volume, what are the leverage you have to continue to drive margins high? Maybe you can give us an update on F&E and your initiatives there?

Bill Lowe

Well, F&E does continue, Per touched on one on (inaudible) which is Macedonia which is part of the project. We continue to make progress there. I think I have said multiple times that the going forward, we will see changes more on a step basis, in other words as we complete various pieces of the reorganization, complete the moves, complete the closing of certain facilities that have been scheduled, that you’ll see changes at that point.

I said they would probably not start occurring until the first fiscal quarter of next fiscal year, beginning the June quarter of next year, the April to June next year as what we’ve been saying.

I don’t think we could change that view and I think that we’ve held, when you look at the margins that the F&E Group are bring in, they’re staying steady around the numbers that we’ve communicated in the past, in that 15% to 18% kind of range depending on how our Machine Group does a particular quarter. So I think we’re going to see relatively stable margins generally and then we’ll see changes as we sort of make some of those more dramatic moves toward the end of the restructuring period, as when we will see this step change.

Amit Passi - UBS

Got it. Thank you.

Per Loof

You know, we’re about halfway done at this point actually, in terms of actual lines being moved.

Bill Lowe

So we have some more to come. It’s really in the next fiscal year I think you will see a bigger change.

Operator

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

Hamed Khorsand - BWS Financial

You guys have been talking about the supply line as far as the impact from Thailand, but can you talk about demand side here, because the customers in the auto industry, Honda, the Toyota, they’re all announcing on shut downs or the reductions in production because of Thailand and how does that affect you guys because the auto industry is such a important industry for you?

Bill Lowe

Yeah, of course, auto industry is very important part of our business

Per Loof

Of course our industry is an very important part of our business clearly. The Japanese side of that of course are not huge customers of ours. So the fact that Toyota and Honda are closed could have some effect on us, but not as much as for some others just by the fact that they are not huge customers of KEMET.

Hamed Khorsand - BWS Financial

Is there a target as far as your inventory lines concerned I mean have come down this quarter I think a couple of quarters ago, we were at (inaudible) line, so what do are expecting as far as before?

Bill Lowe

I won’t particularly forecast a number, but let’s just say that again the Thailand situation does cloud that answer as well because depending on what we are asked to do or what happens in market place, we may need to actually buy more raw material for instance, so that may increase our inventory balance rather than decrease it. So absent that we would have expected to see a little more decline, not a huge amount but another client. At this point I would say that it will be flat to slightly up at, the Thailand situation has an effect on this particular quarter or they were ramping up to have impact of finished goods in the fourth fiscal quarter.

Per Loof

But I mean just our argument, as Bill was saying here as we speak looking at what we can do to increase our available production capability to support the situation in Thailand.

Bill Lowe

And that would involve buying more material that we had not had on the slate before, so.

Hamed Khorsand - BWS Financial

As far as Tantalum pricing goes, I was under the impression you had some cost of pass-through to customers by now to support your gross margin line, could you comment on that for me?

Per Loof

We have been able to do that and then pricing has held up reasonably well. As I said before I think the major shift in what you see on the gross margin in Tantalum is not a pricing issue per se, it is mix issue and that has to do with the distribution channel inventory correction.

Operator

Our next question comes from the line of Tony Kure with KeyBanc.

Tony Kure - KeyBanc

You just actually answered one of my questions But I just want to drill down a little bit as far as the drivers for the gross margin coming down in the third quarter, you know, Per you mentioned that it was mix being the primary, would you say that’s the majority of the gross margin decline or will it be the other main factors if you had to pick out?

Per Loof

That is the main, I mean the volume and of course the fact that the volume decline happens in a very profitable channel.

Tony Kure - KeyBanc

And then as far as the Thailand impact going forward, I mean you sort of outlined your expectations for the third quarter, is any benefit factored into your third quarter expectations for Thailand?

Bill Lowe

Not really Tony, you know like I said in my comments, there is a possibility that you could see some impact but you know by the time we sort this out as Per said, as we know this will be going on a week or two, till we sort this out, if we do ramp up some to provide support in this flat chain, you know the likelihood is that you’d see something happening in December, but late in December, if at all. So, you know, we have been rather conservative in looking at from this standpoint.

Per Loof

If it has an impact, it’s primarily, it’s going to start in our fourth fiscal quarter.

Tony Kure - KeyBanc

And then as far as new plant coming online, you had a press release out yesterday talking about the new film manufacturing plant. I think the comment in the press release was early December expectation for initial production, understanding that this is probably going to be small at first, do you expect this maybe if we put it in terms of the calendar year for next year, for 2012, how would this expect to ramp from a volume perspective and along those lines, would this be a positive or a negative mix for your gross margins?

Per Loof

It will have a positive effect on gross margin, but you know this is a highly complicated bits and parts and long qualification times and basically working with the Howard vehicle markets and it’s going to take time for that to ramp up and we have a schedule that's going to go several years out before you know the lines are fully in place. So it’s going to take a long time, it’s going to be a nice add to our company and nice add to our capability.

It’s really nice to do this in America for obvious reasons and I think given the fact that we are working with the best of the best in the industry to do this. I think that's going to be a real nice benefit for our company.

Bill Lowe

I mean Per we've said in the past, it’s going to start in that period, but from a materiality standpoint, it won't be that material to the numbers, Tony next calendar year.

Per Loof

We've got to ship products in December.

Bill Lowe

We will ship products, but it’s not going to, but again I think I am looking, we are looking more towards the following fiscal year as more of an impact and as we get closer to that period, we will talk more about that.

Tony Kure - KeyBanc

And then just last question on the factory going up in Europe, I think you said it was a €12 million impact, I didn't catch what the €12 million, was that revenue.

Per Loof

That's the investment in the facility and the lines that are going in there. The additional lines that are going in and then of course we are, but basically we are moving capability from other parts of Europe into [Scopia].

Bill Lowe

And that’s included in our capital number Tony, it’s not additional.

Operator

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

Marco Rodriguez - Stonegate Securities

I was wondering if you could talk just a bit more about the industry adjustments there. I mean I am wondering if you could provide some sort of a confidence level in terms of kind of just being temporary one or two quarters?

Bill Lowe

Did you tell me the supply chain adjustments?

Marco Rodriguez - Stonegate Securities

Yes.

Per Loof

You’re talking about Thailand or you’re talking distribution?

Marco Rodriguez - Stonegate Securities

Distribution, sorry.

Per Loof

The distribution, we know exactly what our inventory levels are and the distribution channel and as always happens this is over inventory and this is a known factor in the business and they did and now they are bleeding through that. We are not seeing their sales to their customers, it’s pretty stable. So we believe this is going take a few quarters maximum to bleed through and once that is done, we go back to normal rates in the distribution channel again.

Bill Lowe

I think Per, to your point, the two things as Per mentioned one is that we know what our inventory levels are there. And while we also know what their end demand is. So we see that’s steady and then thirdly, of course, you expect that we actually have conversations with our distributors. So their view is that, they know they have more inventory they’re working off and the view is a couple of quarters of adjustment. So we get that through both statistically looking at the numbers we see in the system as well as a lot of conversations with our distribution partners.

Per Loof

What we don’t know of course is what’s going to happen to the distri channel as a result of the Thai situation and one could make the argument that if the Thai situation is somewhat prolonged, that could have the effect that the inventory correction is much faster.

Bill Lowe

But it will happen quicker than what we expect, which is not a bad thing.

Per Loof

So I mean our two quarter correction cycle is really based on Thailand update part of the price.

Bill Lowe

Right. The Thailand has no impact which is probably not the case, but we’ll see.

Marco Rodriguez - Stonegate Securities

Great. So just also a clarification with regard to Thailand, so you talked about supporting the channel there. Are you kind of – are you saying that we’re taking market share there or you will be selling additional product to may be competitors that fill the channel you can kind of clarify that point for me?

Per Loof

It could be both, actually we will listen to what people want to talk to us about and we have said publicly that we are willing to support these companies that have come into this horrible situation and we’ll take it from there and I think I’ll leave it at that for now.

Marco Rodriguez - Stonegate Securities

Okay, perfect. And then one last quick question on the operating expenses, on the SG&A forecast to not to kind of come down. Can you talk a little bit more as far as your expectations is far as that line item goes for the rest of this fiscal year?

Bill Lowe

I think it’s probably closer to the forecast we just gave in that 24-25 probably a 25 number is not a bad number to put in there for the fourth quarter as well if you were actually going further forward. I don’t expect it to be that variable as we finish the fiscal year.

Operator

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

Unidentified Analyst

Hi, good morning. This is actually [Vipul] filling in for Wamsi today. Just wanted to ask a couple of questions again on Thailand. From the commentary it looks like you are going to see a lot benefits starting in the March quarter; is that because there is some qualification that needs to happen for your parts to sell in Japan. I mean I am trying to understand why you wouldn’t see more benefit in the December quarter?

Per Loof

It’s again a little early to completely you know be able to comment on, but no I don’t think there is going to be qualification. It shows there is going to be some if indeed it is a prolonged situation, its going to take a little bit of time for us to ramp up number one. Number two, there is inventory in this distri-channel that we talked about that will be bled-off first which is not a bad thing.

And thirdly, the affected companies, I would expect will have something in the pipe already and that’s you know they may have six, seven, eight weeks of inventory in the pipe already that of course is going to go first and then distribution is going to go and then whatever we are asked to do and you know either in the marketplace will also by affected companies. So it’s little too early to sort of comment on exactly when this will hit, if it will have an affect on us it will be late in this quarter, but more so in the following quarter.

Unidentified Analyst

Alright, and the last one on Thailand from me was, and this may be too early again but just your estimate of how soon based on what you know how soon can the capacity come back online in Thailand and if you have share gains I mean do you think those could be sustainable going forward? Just wanted to get your thoughts on how soon capacity would come back online and how much share again you might have?

Per Loof

We have no idea. We have not been there and I don’t think the effected companies have had the opportunity to go back into their plants either. So that’s a question that we can’t really answer. So we’ll have to wait and see you know after the water subsides and people are able to go into their facilities and assess situation then we will know.

Unidentified Analyst

Okay. All right. And then on with respect to your efforts in the Congo, when do you think you would start seeing meaningful shipments from there and if you can just comment on tantalum pricing going forward?

Per Loof

We have bought our first batch that is now on its way to the smelters, to be processed and we may see that first coming in the January timeframe. And of course, we are still working through the full qualification of where the supply lines, and we will expect that to have be meaningful from the Congo maybe in the first or second quarter of our next fiscal year.

Operator

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

Matt Sheerin - Stifel Nicolaus

So, a couple of questions, one just another one on Thailand, have you looked as I am sure you have, but it’s still very early to tell I suppose, but if you are looking at the product portfolio of NEC, have you identified a percentage of overlap there whether it would be customers or products so that if there is certainly a need and when the industry is depleted as you say, you will have opportunities, have you figured out that percentage?

Per Loof

Matt, we’ve known each other for some time and you know the answer to that question, Matt.

Matt Sheerin - Stifel Nicolaus

I am hoping to hear it from you.

Per Loof

You know, I think if companies indeed come to us and customers come to us and ask for some support I think we will have the ability to be of some support.

Matt Sheerin - Stifel Nicolaus

Okay, that’s fair. And then, so if you look at your revenue guidance and then your gross margin and SG&A guidance, its implying sort of a 6% operating margin or so which is, that's the lowest number in a few quarters here. Do you think that's the bottom, I mean it sounds like you think that distribution correction will take another quarter which implies another weak margin mix if you will in March and of course as you said the whole Thailand issue is a wildcard at this juncture some time to figure out if you think this is sort of a bottom in terms of margins or it could be bouncing around here for a while?

Per Loof

I think since the correction is taking place in the distri-channel, our anticipation is that this will sort of be at the bottom now. And the ones that I think works its way through and I think, what we do or not do in Thailand is one thing, but I think it will have an effect relatively quickly on some product lines and the distri-channel. So the distri-channel may -- it’s a reasonable assumption to view the distri-inventory is bleeding quicker as a result of Thailand than staying as was anticipated.

Matt Sheerin - Stifel Nicolaus

Okay. AVX had commented that they thought that the distribution inventory wasn’t a perfect match to fill some of the NEC product lines because of the case sizes, do you see that as well?

Per Loof

I mean the smaller case sizes, I think AVX is correct on that. I think on the other ones may be the distri-channel will be able to fill that.

Operator

Your next question comes from the line of [Todd Vernoff with Fore Research Management].

Unidentified Analyst

I just wanted to ask you quickly about utilization rates in the tantalum and ceramic segments and where do expect to see them this next quarter and where were they in the past quarter?

Bill Lowe

Well, utilization, we talked about ceramics, it’s about 73%, 74% utilization and of course the way we measure that is if we were to run everything 24/7 and of course we run at it a little less in that and then that’s why we get to the 73% range. The others are in the 80s, 90s percent range, so pretty high and of course if indeed we are now seeing, we talked about tantalum may be too much, but that may have an impact on the capacity utilization in some of our segments.

Operator

(Operator Instructions). And there are no questions at this time.

Per Loof

Okay, well, we appreciate you coming on the call and we’re looking forward to talking to you more over the course of the quarter and clearly working with you as we go forward and thank you very much and wish you all a great rest of the day.

Bill Lowe

Thank you.

Operator

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

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