KEMET's CEO Discusses F3Q12 Results - Earnings Call Transcript

| About: Kemet Corporation (KEM)

KEMET Corporation (NYSE:KEM)

F3Q12 Earnings Call

February 2, 2012 09:00 am ET

Executives

Dean W. Dimke – Director of Corporate and Investor Relations

Per-Olof Loof – Chief Executive Officer

William M. Lowe, Jr. – Executive Vice President and Chief Financial Officer

Analysts

Matthew Sheerin – Stifel Nicolaus & Company, Inc.

Wamsi Mohan – Bank of America/Merrill Lynch

Sherri Scribner – Deutsche Bank

Hamed Khorsand – BWS Financial

Anthony Kure – KeyBanc Capital Markets

Marco Rodriguez – Stonegate Securities

Operator

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

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

Dean W. Dimke

Thank you, Lincy. This is Dean Dimke, Director of Corporate and Investor Communications. Good morning. And welcome to KEMET’s conference call to discuss our financial results for our third quarter ending December 31 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 third 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 and 10-Qs and recent registration statements, filings for additional information on the risks and uncertainties.

And now, I’ll turn the call over to Per.

Per-Olof Loof

Thank you, Dean and good morning, everyone. As anticipated, the demand for our third quarter ending December 31, 2011 fiscal 2012, softened relative to the first half of our fiscal year 2012. The revenue came in at $219 million, in line with our amended guidance, which we released on January 13. As many have reported, demand in Europe in particular, but also in Asia softened towards the end of the year.

Furthermore as we have been saying and expected our distribution partners continue to rebalance our inventory. Non-GAAP operating income was $10.3 million or 4.7% of sales and non-GAAP diluted EPS was $0.04. Third quarter order intake was up slightly over second quarter and we see no reduction in our market share. Certainly demand for the quarter was negatively affected by the economic realities that I have described. However what is encouraging is that in the quarter where revenue is the low we’d like it to be; we still made money and added $21 million in cash from operations. Several years ago that would not have been the case.

Our strategies which include maintaining a lower cost structure with a reduced break-even threshold focusing on grow our share markets that require more customized capacitance solutions and seizing upon opportunities that bring immediate value to our stakeholders helped us remain in profitable even in less than ideal economic environment.

Approximately two weeks ago we outlined our comprehensive economic and charitable program related to the procurement of conflict free tantalum ore in the Democratic Republic of Congo. The implementation of this closed pipe approach from mine to Conflict-Free Smelter was Tantalum Business Group’s second step of the previously announced corporate vertical integration strategy, which focuses on gaining greater control of our critical raw material supply chain and cost containment independent of the particular capacitance solutions.

The first step was a start-up of our tantalum wire manufacturing assets over one year ago.

This morning’s announcement that KEMET has signed an agreement to acquire all of the outstanding shares of Niotan Incorporated, a leading manufacturer of tantalum powders, from an affiliate of Denham Capital Management LP was the defining third step in the effort to completely vertically integrate KEMET’s Tantalum business from the mine to the production of tantalum powder to the manufacture of capacitors using that powder.

Niotan has been a significant supplier of tantalum powder KEMET for several years. And while we still require specific powders from other suppliers depending on the market demand, the Niotan operation, the largest in the western hemisphere makes KEMET the only manufacturer of tantalum capacitors of any appreciable size to be completely operationally [particularly] integrated.

Keeping with the vertical integration strategy, the key drivers for this acquisition were as follows: The ability to control a substantial portion of our supply chain in a business that has been considerably raw material speculation over the past 18 months, resulting in raw material price hikes of over 300%. These price hikes and the necessary increase of that flow-through to our customer base created some anxiety in the market relative to deciding in tantalum capacitors and solutions.

Unchecked, this could have caused some long-term migration away from tantalum, where ever possible, the less desirable, a potential less reliable, but more cost manageable solutions. We believe by taking this action, we will leave the industry in increasing the market’s confidence for the designing of tantalum capacitors.

For Niotan, KEMET will pay an initial purchase price of $30 million at the closing of the transaction, an additional deferred payment of $45 million over a 30 month period after the closing. KEMET will also be required to make quality royalty payments for tantalum powder produced by Niotan after the closing of the transaction in an aggregate amount equal to $10 million by December 31, 2014.

The transaction is subject to customary closing conditions including expiration or termination of the waiting period under the Hart-Scott-Rodino Act, and is expected to close in March 2012. We expect to see an increase or benefit it in our Tantalum business unit, gross margin of approximately 3 basis points over the next 12 months as a result of these actions.

Gross margin benefit will continue to increase as we fully implement and integrate our powder supply and value chain. Our anticipated payback period is two to three years driven by volume and when the market fully recovers. Another benefit of this acquisition will be the ability to internally manage the R&D elements focused on developing high quality events, tantalum capacitor powders specifically suited for KEMET and our customers’ application. By leveraging these capabilities, we feel we will further increase our leadership position in this market.

We anticipate the fourth quarter to be in line with the third quarter. Distribution channels are continuing to address our inventory position after the significant build brought on by the incredibly strong rebound over the last year and a half. However, and let me just share one data point; there is only one data point. one of our largest distribution partners in Europe just share the sales of our products in the region, positive book-to-bill, burning inventory, and their best performance since September.

Additionally, the earthquake in Japan last year caused some customers to overbuild some inventories favoring that might not be able to obtain parts. The Thailand floods have not affected KEMET’s manufacturing facilities, nor have we received any information that our suppliers have had issues caused by the floods. There have been no negative consequences to our manufacturing capabilities. That said it has contributed to a softening in demand at some products that are capacitors go into have been negatively affected.

Inventory management remains key for us, and I’m happy to say that we’ve reduced inventories this last quarter to maintain alignment with market conditions moving forward. Expectations, moving forward are that we will continue to draw down inventory levels consistent with market demands.

We continue to make solid progress with our restructuring of our Film and Electrolytic business. As previously announced, we have completed Phase I and have broken ground on our new manufacturing facility in Skopje, Macedonia. This facility is a component of our long-term strategy of consolidating and maintaining manufacture for our European customer base, while fulfilling our objective of lowering the cost structure associated with our Film and Electrolytic business.

Before I go into detail regarding the performance of the individual business groups and regions, I’ll turn it over to Bill Lowe to review our financials for last quarter. Bill?

William M. Lowe, Jr.

Thanks Per, and good morning, everyone. I’m going to begin on slide 3 if you’re following along on the website and that is the income statement highlights.

Net sales were $218.8 million which were down approximately 17% over last year’s same quarter of $264.7 million. Our SG&A expenses were $24.7 million or about $3.6 million lower than the previous quarter and $2.7 million lower than last year’s same quarter. Looking forward towards next quarter, our expectation is that SG&A expense should be in the range of $25 million to $26 million.

Our GAAP net loss was $27.8 million or $0.62 per basic share for the quarter. Our GAAP results included a $15.8 million impairment charge related to the Tantalum business unit, $10.5 million related to planned facility closures and severance, and $300,000 related to equipment moves.

Referring to slide 4 now, our non-GAAP adjusted net income was $2 million or $0.04 per share for the quarter. And adjusted EBITDA was $20.2 million.

On slide 5 our non-GAAP gross margin as a percentage of sales decreased to 18.8% compared to 23.8% in the prior quarter, driven primarily by our Tantalum business unit.

Now if we look at the balance sheet on slide eight. We generated $21 million of cash flow from operations in this quarter and entered the quarter with unrestricted cash of $136 million, which was up $8.8 million over the prior quarter. During this quarter we paid down the remainder of our outstanding convertible notes of $37 million and inventories declined approximately 12.5 million during the quarter, which was in line with our statements during our last earnings call that we would continue to work to decrease our inventory balances by the end of December.

And our DSO dates were 43 days and our payable DSO was 37. Capital expenditures during the quarter were $11.7 million and are $31.8 million fiscal year to-date. And we would expect capital expenditures for the fourth fiscal quarter to be in the range of $17 million to $20 million. Our bank revolver continues to remain undrawn at this time.

Looking out to the next quarter, which ends March 31, we see revenue down into the range of approximately $200 million to $210 million compared to the December quarter and maybe some additional pressure on our gross margin. Experiments and early we believe that this represents the bottom of the curve and we have taken measures to secure our supply chain, our largest raw material and create efficiencies that relate to that as well as continued realignment of our European business position us for a quick rebound when the world economies improve.

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

Per-Olof Loof

Thank you Bill and let’s take a quick look at our businesses and our regions. Ceramic, Tantalum, Film and Electrolytic as well as Europe, America and Asia. I’ll start with some of Electrolytic. Revenue this quarter was $79.2 million, down approximately 80% compared to Q2. The revenue decline was driven by a pullback in Machine revenues from peak shipments in Q1 and Q2 as well as softening in the components business associated with an inventory correction across all channels, as the global economy continue to be impacted by the European financial crisis and the general slowdown in demand from China.

Gross margin declined to 13% in Q3 as lower volumes negatively impacted fixed cost absorption. Our focus on cost initiatives and product mix optimization in this business continues. And we will take advantage of the temporary decline in volume to accelerate these activities.

The book-to-bill for Q3 was 0.65 and was negatively impacted by the general market conditions outlined above. Backlog remains strong relative to historical levels, but declined by approximately 20% in Q3 versus the previous quarter. In our ceramics business, Q3 revenue was down by 15.3% over the previous quarter to $47.5 million, as inventory correction continued in the distribution channel. Financial market uncertainties in Europe coupled with the general softness in the Asia consumer markets also contributed to the revenue decline.

Although, total revenue was down, specialty segment revenue remained strong in Q3. Gross margin results remained very solid at 34.3% as a result of continuing progress on product mix optimization and manufacturing cost initiatives.

The Q3 book-to-bill ratio was 0.84 and backlog was down slightly driven by continued channel inventory adjustments in the commercial product segment. Capacity utilization for Q3 remained stable at approximately 73%.

On the Tantalum side of the business, we ended Q3 at $92.1 million, down from $112 million in the previous quarter. Gross margin as a percent of net sales was 15.8% and non-GAAP operating income as a percent of net sales was 1.4%. OEM customer demand remained stable. However, higher inventory levels in the distribution channel continued to result in lower than normal order in ship rates. These inventorial levels will allow distributors to respond to customer needs quickly, overtime returning the order rate to reflect the more true demand. Our book-to-bill ratio has shown some improvement versus last quarter and is currently, slightly above 1.1.

In the Asia-Pacific region, sales for Q3 were $70 million, a drop of 9% over the previous quarter. The markets soften Asia beginning last July based on several factors. First, real demand decreased for both EMS and OEM channels due to declining demand from end customers. Second, is the inventory correction cycle. and third, notebook's output fell by 15% quarter-over-quarter, impact to impart by the hard disk drive shortage, resulting from the Thai floods. The good news is that Asia Q3 booking rate has improved significantly quarter-over-quarter. And looking forward to Q4, we expect similar revenue results as Q3 even with the market remaining flat for the automotive, industrial and green energy segment. Quarter to date book-to-bill is at one, and we foresee Asia demand ramping up after March.

In the EMEA region, we sold revenue of 85 million, a decline of approximately 21% compared to the previous quarter. The Eurozone debt crisis has played its part as general economic confident suffered, however, detailed analysis of the revenue decline shows that revenue from the OEM channel was only 10% down compared to the previous quarter while revenue of the distribution channel dropped by approximately 30% over the same period.

One of the key drivers for revenue reduction was in the distribution channel was excess inventory of course, (inaudible) haven’t issued measures to correct these levels. The EMEA market book-to-bill continued to be negative mainly fueled by the distribution channel inventory reduction and reduced lead times. Looking forward to Q4, we anticipate a similar quarter compared with Q3.

Revenue in the Americas region was negatively impacted in Q3 as the inventory correction cycle peaked causing sales to drop to $64 million, or by approximately 21%.

during the quarter, new orders slowed as our distributors, the OEMs and EMS providers worked off the excess inventory, they have stockpiled after the natural disasters in Japan and Thailand. We expect this current inventory correction cycle to last approximately one more quarter as we have seen declining inventories and improving underlying end demand.

Book-to-bill ratios have improved from a negative book-to-bill of 83 at the beginning of the quarter to the current book-to-bill ratio of 1. The automotive and commercial aviation segments are holding up particularly well and continue to show signs of strengthening which bodes well for us as we enjoyed strong positions in the segment.

From a segment component perspective, we saw decreases across the board. On a percentage of revenue basis military and medical however increased to 11% of the total. Telecom and computer was at 19% and 14% both slightly down compared with Q2. Consumers at 10% remained stable on a percentage basis.

Transportation at 21% saw the largest increase on a percentage of revenue basis compared to last quarter, while industrial at 25% were slightly down quarter-over-quarter.

From an overall market perspective we can expect some changes moving forward as the channels still rustles with a higher level of inventory. Transportation paced by automotive demand and continued growth in electronic content should remain solid. In addition while we continue to hear a lot about the military budget cuts we do not expect this to impact us in the short-term and in fact believe small assistance will increase the overall demand for electronic components.

Over the long-term medical market should remain stable. Telecom infrastructure demand will weaken somewhat even though long-term broadband demand remain strong as operators try and make the most out of their installed capacity. In general, we also expect this segment to be a solid contributor over the long haul.

While there is softening in the industrial segment overall they remain pockets of strength. With regard to alternative and sustainable energy we still expect the market to show double-digit growth in wind and solar type installations even with the global cuts in incentives.

In addition the focus on green energy and energy savings will drive the lighting segments. The consumer and computer segments will continue to be soft however there are some bright spots for computing in the near term. The adoption of solid-state drives in the Ultrabook Category will increase demand for specific surface on capacitor types. And the cloud computing sec segment remains the bright spot, as server demand for these applications is expected to double over the next few years.

And this concludes our prepared comments. We’ll be happy to respond to any of your questions.

Question-and-Answer Session

Operator

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

William M. Lowe, Jr.

Hello, Matt.

Matthew Sheerin – Stifel Nicolaus & Company, Inc.

Yes. Thank you. Good morning guys.

William M. Lowe, Jr.

Good morning.

Matthew Sheerin – Stifel Nicolaus & Company, Inc.

So, couple of questions. There were some good details there, that was very helpful. In terms of the outlook for the quarter Bill, you talked about revenue in – I believe you said 205 to 210 range and lower gross margin. Does that mean you…

William M. Lowe, Jr.

Matt, let me just correct for this – I said, 200 to 210.

Matthew Sheerin – Stifel Nicolaus & Company, Inc.

200 to 210, okay, so 205 midpoint. And with some gross margin pressure again would you expect to post an operating loss in for the quarter, and higher SG&A?

William M. Lowe, Jr.

Yeah, with a higher SG&A, it’s possible. It’s going to be right around that red zero kind of number or just slightly below that possibly. We’ll work to keep put that – push SG&A down lower, but that’s our current forecast.

Matthew Sheerin – Stifel Nicolaus & Company, Inc.

Okay. And in the press release, you talked about a couple of challenging quarters are ahead. I know there are some [semiconductor] suppliers and the semis tend to lead pass us by a quarter or two, but they’re already starting to see more positive book-to-bill and expectations for a bit of a snap back in the June quarter. Do you see that playing out in the June quarter or do you think that’ll still be relatively depressed for a couple of quarters?

Per-Olof Loof

Yeah, Matt this is, Per. We see the same data you see of course, and we follow the semiconductors guys very closely. And there is data that seemed to indicate that, the June quarter will – this will be the bottom, its kind of what we think. So I would agree with you that the challenging quarters may just be the challenging quarter, and I think we see this to be the bottom. I reported of some data points in my remarks and I think we're seeing that in a couple of places that it seems to be returning a little bit and the inventory burn is starting to kick in, which should be helpful to us or maybe June, we will see a slight up tick.

Matthew Sheerin – Stifel Nicolaus & Company, Inc.

Okay. And could you comment on any opportunities that still arise from NEC having production issues in Thailand. I know that’s been talked about publicly, we really haven't heard anything in terms of positive impact to competitors like yourself. What’s your take on that right now?

Per-Olof Loof

Well, I think if it’s clear that and it's in the public demand of course, the plans in Thailand were severely affected and it’s basically inoperable at this point from what we understand. And then, we have worked with NEC over the years as an R&D partner as you know. So I think we would be relatively well positioned to be supportive and we have reached out to them and say, if there is anything we can do to help you out during this [starting] time, we’ll be willing to do that. So, I think the – this is my personal take, as the hard disk drive situation gets sorted, I think you will see an up tick in demand for those products where the disk drives go and of course, where caps go as well. And I would imagine that we could see some positive impact of that and maybe as soon as in the next month or so.

Matthew Sheerin – Stifel Nicolaus & Company, Inc.

Okay. but you haven't seen any firm orders yet?

Per-Olof Loof

We’ve seen a little bit. I mean, we’ve seen a lot little bit firm, and we’ve had plenty of conversations.

Matthew Sheerin – Stifel Nicolaus & Company, Inc.

Okay, okay. Thanks a lot.

Per-Olof Loof

It’s equal to precursor to an order.

Matthew Sheerin – Stifel Nicolaus & Company, Inc.

Great, thank a lot.

Per-Olof Loof

Okay. Thank you.

Operator

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

Wamsi Mohan – Bank of America/Merrill Lynch

Yes. Hi, good morning.

William M. Lowe, Jr.

Good morning, Wamsi.

Wamsi Mohan – Bank of America/Merrill Lynch

Hi, Bill. Hi, Per. Can you comment on the acquisition, can you give us some sense of what the annual revenues were for Niotan?

Per-Olof Loof

No, we can’t really, but it’s been one of our suppliers over the several years now and basically we will continue to – they will continue to serve their customer base, but of course we see this as an important step in securing our supply chain.

William M. Lowe, Jr.

I think you view it more again as the vertical integration versus…

Per-Olof Loof

It’s not a revenue generator for KEMET..,

William M. Lowe, Jr.

From a revenue side, it’s going to be a cost improvement on the…

Per-Olof Loof

There will be some revenue, basically it will be more – we’ll utilize that plant first and foremost to ensure that our supply gets covered.

Wamsi Mohan – Bank of America/Merrill Lynch

Okay. Thanks, so what percent of your current powder needs re-sourcing from Niotan and do you expect this acquisition to change that percentage?

Per-Olof Loof

That’s not a public information, we don’t share that, but let’s assume that we will source more from Niotan now than we have in the past. But Niotan has been a significant supplier of ours. So it’s not a small in a couple of percentage a significant supplier.

Wamsi Mohan – Bank of America/Merrill Lynch

Incremental would you need to re-qualify the powder with your customers and what’s sort of timeframe would that take?

William M. Lowe, Jr.

There is no re-qualification required, since this is the current supplier.

Wamsi Mohan – Bank of America/Merrill Lynch

Okay and again this might not be something that you might be able to share, but does Niotan source ore from non-Australian mines mostly or is it from Australia. I notice sourcing anything from the DRC?

Per-Olof Loof

They actually source, they don’t source ore directly, they actually source KTaF, the second step of the process. So they’re not outsourcing from any of the mines. But clearly where we are laid out now with – the Make Africa Work program as we anticipate that we can actually have a close pipe system all the way from the mines into the smelter itself.

Wamsi Mohan – Bank of America/Merrill Lynch

And just to clarify, did you say that there was three points of gross margin impact over the course of the next 12 months and do you see that changing over the longer-term?

Per-Olof Loof

That would improve over the long term.

William M. Lowe, Jr.

That would just be as we start to ramp up and get the incremental changes as Per was saying to the volume, that’s the impact just in that first 12 months that we’ll – where we’ll end up within the first 12 months. It will continue to increase.

Per-Olof Loof

And one other point of this, as we anticipate that we can speed up the time it takes to get from mine to smelter or through smelters, through this process. As I said, the smelter is in Nevada and so we could improve that time quite significantly we believe.

Wamsi Mohan – Bank of America/Merrill Lynch

Okay, that’s helpful, Per. And then last one from me, what was the impairment of the $16 million in tantalum and the quarter related to?

William M. Lowe, Jr.

It was related to assets in our Evora, Portugal, facility that in our view is have been technologically outdated.

Per-Olof Loof

Yeah.

William M. Lowe, Jr.

And we have been using them for a little while and that’s why we said that they would not affect our capacity utilization going forward.

Per-Olof Loof

These were assets that were acquired back from EPCOS in many years, in five, six years ago.

William M. Lowe, Jr.

The demand, based on the technology we were using, we’re going to use different equipment to provide a better product to our customers than what that equipment could provide.

Wamsi Mohan – Bank of America/Merrill Lynch

Okay. Thank you very much.

Operator

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

Sherri Scribner – Deutsche Bank

Hi, thanks. I just had a couple of clarification questions. On the SG&A comment, $25 million to $26 million next quarter, is that excluding the non-GAAP item? Should we use that in our model or would that, or would you exclude some stuff from that?

Per-Olof Loof

Well, that’s probably above the non-GAAP number. it could be a little lower than that as we work through for the quarter, we’re working to reduce it, be it somewhere in the same range the other lower end of that range for the next quarter, but I would consider that to be the non-GAAP number.

Sherri Scribner – Deutsche Bank

Okay.

Per-Olof Loof

We don't typically have too many things that run through SG&A that we’d backout for non-GAAP anyway.

Sherri Scribner – Deutsche Bank

Okay, so that number goes up a bit versus where we are this quarter.

Per-Olof Loof

Well, just a little bit...

William M. Lowe, Jr.

Just a little bit, it may go from million dollars from where we are today. We’ll try to be on the low end of the range, but...

Sherri Scribner – Deutsche Bank

Okay. And then, typically you give operating margins for F&E in the Ceramics business, I know you give it for Tantalum. can you give us operating margins for F&E and Ceramics?

Per-Olof Loof

The operating margins for ceramics, top of my head is about 20%, and the operating margin for F&E was slightly below that.

William M. Lowe, Jr.

That's right.

Sherri Scribner – Deutsche Bank

Okay. And then in terms in the machining revenue that declined sequentially, can you give us a sense of how much it declined and know it was?

Per-Olof Loof

It declined about $5 million.

Sherri Scribner – Deutsche Bank

Okay. Great, thank you.

Operator

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

Hamed Khorsand – BWS Financial

Good morning.

William M. Lowe, Jr.

Good morning.

Hamed Khorsand – BWS Financial

First one is, how immediate is it that you can see a benefits to the gross margin line from this vertical integration?

Per-Olof Loof

Next fiscal year? I mean, we’ve got to close it first. I mean, we got to – so we expect to close in March and this is a current supplier. So we’re not talking about qualifying. So we will see benefits come in the second half of next fiscal, and overall, it will be about three gross margin points for the year.

Hamed Khorsand – BWS Financial

Okay.

Per-Olof Loof

And then it's (inaudible) as we go forward.

Hamed Khorsand – BWS Financial

Would you be then basically taking all your Tantalum or from the Congo and then sending it over into Niotan to become powder?

Per-Olof Loof

Yet to be determined. We think that the Congo has as we improve that activity and ensuring that we can do it comfort free, it could be a significant supplier for us. Yes.

Hamed Khorsand – BWS Financial

Okay. And as far as inventory goes in the channel, how many weeks of inventory is right now in the channel? What do you think your – the goal is?

Per-Olof Loof

I think the goal of our distribution partners is typically to be have a turn, the turn to be between three and four, typically what they want. The catalog guys will probably want to be a little below that, and so they are fighting to get to that level and that we can see as I mentioned, one of our (inaudible) partners saw a quite a bit of burn in Europe right now, and so that's a positive sign. So I think we have another quarter of rebalancing activities in the channel at least maybe slipping into Q1 of our fiscal next year as well. But it’s happening...

Hamed Khorsand – BWS Financial

Okay.

Per-Olof Loof

It is happening.

Hamed Khorsand – BWS Financial

All right. Thank you.

Per-Olof Loof

Thank you.

Operator

Your next question comes from the line of [Amitabh] Passi with UBS.

Unidentified Analyst

Good morning.

William M. Lowe, Jr.

Good morning.

Per-Olof Loof

Hi

Unidentified Analyst

Good morning. Bill, I was hoping and I apologize to go back to this, if you could just clarify how would you say the benefit from the acquisition would be 3 basis points, but now it sounds like its 300 basis points to go...

William M. Lowe, Jr.

(Inaudible) its 300 basis points. When I’m talking about points I meant percentage, not the basis points.

Per-Olof Loof

300 basis points.

Unidentified Analyst

No, perfect. And then...

William M. Lowe, Jr.

(Inaudible) remember.

Unidentified Analyst

And then, I guess I’m still trying to understand that seems like you cumulatively you’ll pay above $85 million for this deal. Just trying to understand like, how do we think about the return for this investment you’re making? I’m still a sort of struggling to see…?

William M. Lowe, Jr.

Well, I think Per’s comments said, two to three years payback.

Unidentified Analyst

Okay.

William M. Lowe, Jr.

And of course that depends on about how volumes pick up here and what speed they pickup, but I think you can do the math on that one.

Unidentified Analyst

Yeah. And then, where exactly did you get this 300 basis point uplift from?

Per-Olof Loof

From the fact that we’re able to source at better prices of course.

Unidentified Analyst

Okay.

Per-Olof Loof

And we can stabilize our supply and we can also lower the costs of this activity and that’s where the basis points, that’s where improvements come from.

William M. Lowe, Jr.

As it require then becomes an inter company transaction as well versus external third party relationship.

Unidentified Analyst

Got it.

Per-Olof Loof

This has been part of our strategy for several years now, including the – starting with the manufacturing of wire, then making sure that Africa can work, and now the final one being our ability to control our own smelter. But we’re able to sell to our other customers as well; we’re not going to prevent our friendly competitors to buy from them as well of course.

Unidentified Analyst

Do you give any sense to what percentage of the overall market you will basically control with the Niotan acquisition?

Per-Olof Loof

That’s a difficult one to say. And we really don’t want to comment on that actually, because there are so many factors that will impact that. How other smelters react and what the market demand looks like and so forth and so on. And also what types of powders are going to be mostly in demand and so forth. So there are many factors that impact that, so it’s not a short one-line answer to that.

William M. Lowe, Jr.

No, I think as Per said in his formal remarks, we’ll still be sourcing from our other, some of our other current suppliers. So this is something that sound exclusive. It’s going to be a substantial portion, but we are going to be continuing to source powders from our other current suppliers.

Per-Olof Loof

In June, we acquired a full facility in Knoxville from one of our competitors and that facility has sourced to us, but continued to source to their former customers as well. So we kind of know how this will work.

Unidentified Analyst

And Per, do you have just going to your segments quickly ceramic, tantalum, and F&E, do you know what ASP did in this three segments respectively?

Per-Olof Loof

Yeah, ASP was pretty stable actually.

Unidentified Analyst

Is that quarter-over-quarter?

Per-Olof Loof

Quarter-over-quarter, yeah, we’re not seeing a lot of ASP version.

Unidentified Analyst

And then maybe just last one from me, like what explains like your ceramic gross margins very resilient, but we’re seeing quite a bit of weakening in tantalum and F&E. Maybe you can just help me understand the disparity in terms of margin performance across the three segments?

William M. Lowe, Jr.

Well, I think what explain the difference is the, what the product mix in ceramics that’s really the answer and we had a very positive product mix in this quarter.

Unidentified Analyst

Okay, got it. Okay, thanks. I’ll jump back in queue.

Operator

Your next question comes from the line of Anthony Kure with KeyBanc.

Per-Olof Loof

Hi, good morning.

Anthony Kure – KeyBanc Capital Markets

Hey, good morning gentlemen. Just a couple of questions on the book-to-bill numbers. Could you comment on what those were actually in January across the segments?

William M. Lowe, Jr.

I think we did comment on those in my script. The book-to-bills are returning and…

Per-Olof Loof

Let me just give him…

William M. Lowe, Jr.

So we are about – we’re a little below one overall, but a very differently between the different units. And basically Europe is closing in a one. Asia is a bit lower, but then again Asia has the New Year. So that you have a week more than a week, lot of activities there, so that affects that. And America was around one too – backup…

Anthony Kure – KeyBanc Capital Markets

Okay, maybe along with the same lines, if you could just comment on what lead times have done here recently with the last several weeks of those lead times have been stretched out now across all segments or is there a disparity within the segments?

Per-Olof Loof

I think there is some disparity between the segments and we’ll see lead-time is being pretty stable now actually. Maybe increasing a little bit, but pretty stable.

Anthony Kure – KeyBanc Capital Markets

Okay. And then as far as the restructuring, you had an announcement back in November sort of there is going to be obviously some restructuring savings in fiscal ‘13 and then more pushing to ’14. Can you review sort of the dynamics around that and thought process or just sort of the moving parts? And then maybe talk about what the expected savings are in fiscal ‘13 again and the expected savings in fiscal ‘14?

William M. Lowe, Jr.

What we have said – what we’re doing, we’re doing precisely what we said we will do. We’re building the new facility in Skopje, which will be our low-cost manufacturing facility of Europe. We are moving activity, moving manufacturing activities from higher cost areas in Europe into that facility. We believe that facility will be able to receive machines and equipment in May timeframe. And as we move forward, we will see that capability increase.

Also we announced that we are closing down some plants in Italy. We have had that conversation with the unions and that is well working going forward according to plan as well. So I think the whole issue there is to ensure. And as I said, because of the slowdown in Europe in particular, we think we can actually speed up this process. And we’ve said that, we have about $13 million a quarter of additional abilities to restructure that business. So that’s going according to plan. And next year will be a moving on year to a large extent and the full extent of this will happen in fiscal ‘14.

William M. Lowe, Jr.

I don’t think I mean – I think the numbers we’ve provided you on previous announcements Tony, has not changed.

Anthony Kure – KeyBanc Capital Markets

Okay. Thank you.

Operator

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

Marco Rodriguez – Stonegate Securities

Good morning and thank you for taking my question.

Per-Olof Loof

Hi, Marco.

Marco Rodriguez – Stonegate Securities

Hi, one of the follow-up in regard to the Niotan acquisition. So, given some of the commentary you had in your prepared remarks, I mean, is it clear that you are kind of done with the vertical acquisitions there?

Per-Olof Loof

In Tantalum, yes.

Marco Rodriguez – Stonegate Securities

Okay. And then, as a bit of a follow-up in terms of the supply of that powder to you, assuming a normalized demand environment, would you basically outsourced all of your supply from them or you still need outside sources?

Per-Olof Loof

No. We’re going to continue to use our other suppliers as well to some degree. But clearly, we will move more over to that than we otherwise probably would of course.

Marco Rodriguez – Stonegate Securities

Okay. And then lastly, if you could provide a little bit more color obviously you said that you’re going to have about a 300 basis point improvement in gross margin for that segment. But you did comment that you would see some further improvements in the longer-term. Can you kind of help qualify what that might look like?

Per-Olof Loof

Well, we think that the effect of next year’s activities would be, it’s going to take sometime to get started, may of course not be fully recognized. So I think you cannot completely double that, but it's going to be a significant improvement as we get the whole thing into full screen. So I'm not saying it's going to be 600 basis points, but it will be more than 300.

Marco Rodriguez – Stonegate Securities

As the long-term progresses?

Per-Olof Loof

Long-term, yes, absolutely, absolutely.

Marco Rodriguez – Stonegate Securities

Okay. Got it. Thank you guys.

Per-Olof Loof

Okay, thank you.

Operator

Your next question comes from the line of Amit Passi with UBS. I'm sorry [Todd Vernoff with Fore Research Management].

Unidentified Analyst

Good morning, thanks for taking the question. I have a quick question on your cash flow from operations, what is your expectation for Q4?

Per-Olof Loof

We didn't give you a cash flow expectation and just basically gave you a CapEx for the quarter. We've continued to generate cash and reduce inventory, but we're not providing a forecast actually for the cash flow for next quarter.

Unidentified Analyst

Okay. And then maybe let me ask you this. If you may maintain your current realization rates, what is your break-even EBITDA margin? It’s kind of get to a break-even cash flow from operations?

Per-Olof Loof

Break-even.

William M. Lowe, Jr.

What do you – is it EBITDA?

Unidentified Analyst

A lot of its…

William M. Lowe, Jr.

Or from gross margin as it is easier...

Per-Olof Loof

Well, I don't think that's the way to look at it. because we (inaudible) as you take inventory, reduced inventory $12 million this year, which of course generates cash flow from operations. So there is multiple components that goes into what generates cash flow from operations that we have some trigger points to play with, and as the revenue does bottom out this quarter. So we think this is the bottom. We looked to reduce inventories to create cash flow from operations to be positive. I would expect you to see it to be positive from that standpoint, but I’m not going to peg a number on it or a percentage against an EBITDA target for sure.

Unidentified Analyst

Okay, okay. Got it. Thank you.

Operator

And your next question comes from the line of [Amitabh] Passi with UBS.

Unidentified Analyst

Hi guys. Just a clarification and I think you did. I just wanted to confirm again going back to Niotan, the 300 basis point improvement. is that just in the Tantalum segment or where you implying (inaudible)?

Per-Olof Loof

That's tantalum.

William M. Lowe, Jr.

That’s tantalum.

Unidentified Analyst

Thank you.

Per-Olof Loof

Thanks.

Operator

There are no questions at this time.

Per-Olof Loof

Okay. Well, I appreciate you being on the call and thank you for interest in the company, and I wish you all a good rest of the day. Thank you all.

William M. Lowe, Jr.

Thank you.

Operator

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

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