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Executives

Dean Dimke - Director of Corporate and Investor Relations

Per-Olof Loof - Chief Executive Officer and Director

William Lowe - Executive Vice President and Chief Financial Officer

Analysts

Wamsi Mohan - Bank of America/Merrill Lynch

Kevin – Deutsche Bank

Amitabh Passi – UBS

Matt Sheerin – Stifel Nicolaus

Hamed Khorsand - BWS Financial

Anthony Kure – KeyBanc Capital Markets

KEMET Corporation (KEM) F4Q2012 Earnings Conference Call May 10, 2012 9:00 AM ET

Operator

Good morning. My name is Connie and I will be your conference operator today. At this time I would like to welcome everyone to the KEMET’s earnings release for fourth quarter March, 2012 conference call. (Operator Instructions)

I would now like to turn the call over to Mr. Dean Dimke, please go ahead sir.

Dean Dimke

Thank you, Connie. 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 fourth quarter and fiscal year which ended March 31, 2012. On the call with me today is Per-Olof, our Chief Executive Officer 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 fourth 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 may 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 over to Per.

Per-Olof Loof

Thank you, Dean and good morning everyone. Our fiscal year 2012 was an interesting and kind of a pivotal year for KEMET in many ways. We reported revenues of $985 million which represents the third highest yearly revenue in the history of KEMET, all 93 years actually. Our adjusted EBITDA for the year was $128.4 million and non-GAAP to fully diluted EPS was $1.04. Considering the softening of the markets combined with the high inventory levels that we have seen these past several quarters we are pleased with how the year turned out, but not satisfied to remain at this level, of course as we roll into our next fiscal year.

We do anticipate that the painstaking work over the past three years that went into lowering our breakeven point, growing our market share in a more specialized products becoming a truly global business, beginning phase two of the restructuring of our Film and Electrolytic business, stabilizing our Tantalum source by creating a closeness to secure supply line from ore to powder, and the many other initiatives. We will pay back dividends in the form of higher margins and sustain profits in a challenging environment and have us positioned for substantial growth.

Staying on the topic of substantial growth. In early March we announced the joint venture and proposed integration of NEC TOKIN and KEMET. The NEC TOKIN agreement has been signed and is awaiting regulatory approval. KEMET-NEC TOKIN will as a result comprise one of the most exciting component solutions companies in the world. Ever since I joined KEMET I have felt that without a real presence in Japan we cannot truly call ourselves global. This strategy will alter the course for our combined enterprise for years to come and for sure for the better. The long term opportunities for people and business growth have opened up immensely for all KEMET and NEC TOKIN employees and the future opportunities for all other stakeholders, customers and investors, will be at a new and higher plateau.

As a reminder, the transaction comprises three major steps. First, we will form a joint venture with NEC by acquiring a 34% equity stake in NEC TOKIN for a payment of $50 million. The next step will to increase our equity ownership stake to 49% for an additional $50 million. The third and final stake will be to acquire the remaining 51% giving us 100% economic ownership what will be based on a multiple performance at that time. This structure is designed to allow us to align all stakeholders KEMET, NEC -- NEC TOKIN towards the successful integration, rebuilding, restructuring and continued optimization of NEC TOKIN in preparation and anticipation of the third and final step in this transaction.

While our contacts have been necessarily limited today as we dig deeper we will anticipate significant additional opportunities that we will identify during the integration of KEMET and NEC TOKIN’s IT systems, procurement, R&D, operations, finance and human resource operations.

During this past fiscal year we took steps to acquire and stabilize our supply chain through a status strategy of vertical integration. We did as I said, acquire a Tantalum powder manufacturing facility in Carson City, Nevada. This facility now called KEMET Blue Powder along with our agreement to secure Tantalum ore from the Democratic Republic of Congo and our exclusive arrangement with Tantalite Resources in Johannesburg, South Africa completed our close pipe conflict-free vertically integrated Tantalum supply chain. In addition, we also acquired an aluminium foil manufacturing facility in Knoxville, Tennessee from Cornell Dubilier and that allowed us to secure the supply required for the manufacture of aluminium and electrolytic capacitors.

In addition, we have progressed to phase two of our restructuring of our FC business and we will be opening our new low cost facility in Macedonia early this summer.

Lastly, we successfully raised additional funds in the bond market to assure sufficient liquidity for acquisitions and operating in the current environment as we wait for the world economy to rebound from its current level.

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

William Lowe

Thanks, Per and good morning everyone. If you are following along on the website I am going to begin on Slide 3. First for the fiscal year ended March 31, 2012, as Per said, our net sales were $985 million, which is down 3.3% from the previous year. Our adjusted EBITDA for the same period was $128.4 million and our non-GAAP EPS was $1.04 per diluted share.

Our net sales for the fourth quarter were $210.7 million, which were down approximately 3.7% over the prior quarter of $218.4 million. Our GAAP net loss was $11.7 million or $0.26 per basic share for the quarter. Our GAAP results did include $2.8 million expense related to ERP integration cost, $2.2 million of plant start-up cost, which primarily related to the recently acquired Tantalum powder plant in Nevada, and $900,000 of restructuring of which $600,000 related to termination benefits.

Referring now to Slide 4, our non-GAAP adjusted loss was $7 million or $0.16 per share for the quarter. Adjusted EBITDA was $9.7 million. On Slide 5, our non-GAAP gross margin as a percentage of sales decreased to 14.1% which is compared to 18.8% in the prior quarter driven primarily by our Tantalum and Film and Electrolytic business units.

On Slide 6, let me point out to the SG&A expenses were $23.3 million on a non-GAAP basis. This excludes such items such as the ERP integration cost and acquisition-related expenses. Looking forward towards next quarter, our expectation is that our non-GAAP SG&A expense should be in the range of $24 million to $26 million.

Looking now at the balance sheet on Slide 8, we generated $8.8 million of cash flow from operations in this quarter and entered the quarter with cash and our cash equivalents of $210.5 million, which was up $74.5 million over the prior quarter. If you recall, during this quarter we did complete the add-on bond offering which by the end of the quarter was $110 million in aggregate principal amount of our 10.5% senior notes due in 2018, but at an issue price of 105.5%. We also made our first installment payment of $30.5 million for the purchase of Niotan Incorporated, which is now KEMET Blue Powder, and invested $17.5 million in capital expenditures. The additional add-on of $15 million related to the bond offering which brought our total to $125 million occurred in April after our quarter ended and will be reflected in our cash flows during the first quarter of fiscal 2013.

Excluding the inventory acquired through the purchase of the Tantalum powder facility, inventories decreased $5.8 million from $212.1 million at December 31, 2011. We expect capital expenditures for the first fiscal quarter to be in the range of $12 million to $15 million and our DPO was flat this quarter-over-quarter, while DSO increased approximately 2 days to 45 days. Our bank revolver does continue to remain undrawn.

Looking now to the next quarter, which ends June 30, we do see revenue increasing within a range of 3% to 5% compared to this March quarter and improvement in consolidated gross margins of between 200 and 400 basis points. As Per mentioned earlier, we do believe that this represents the bottom of the curve and we have taken measures to supply our supply chain as Per detailed. Our largest raw material and increase in created efficiencies that relate to that as well as continued realignment of our European business operations to position us for a quick rebound when the world economy is improved. And with that I am going to turn the call back over to Per.

Per-Olof Loof

Thank you, Bill. Let’s take a quick look at our business results by the three businesses and as well as our three regions.

I will start with Film and Electrolytics. Revenue in Q4 was $69.7 million, down approximately 12% compared to Q3. The revenue decline was driven by continued softness in our European and Asian industrial markets. Our gross margins declined to a breakeven point in Q4 as lower component volumes negatively impacted fixed cost absorption. Cost in our machine business associated with new designs were abnormally high. Our focus on material cost and restructuring initiatives in this business continues and we will take advantage of the temporary decline in volume to accelerate these activities. The new order rate began to increase late in Q4, improving the book-to-bill to 0.8 versus 0.65 in Q3. This upward trend has continued early in Q1 and has now driven the book-to-bill to above 1.1 early in the quarter. Current backlog is about $80 million and stable as we move forward into the current quarter.

In our Ceramic business, Q4 revenue was up by 7% over the previous quarter to $50.8 million. Demand improved as excess channel inventory returned to more normal levels. Gross margin results remained strong at 30.2% as a result of continued progress on product mix optimization and manufacturing cost initiatives. The Q4 book-to-bill ratio was 0.99 and backlog improved slightly. Book-to-bill is now approaching 1.1 for this quarter. Capacity utilization for Q4 remains stable at approximately 73%.

On the Tantalum side of the business, we ended Q4 at $90.2 million, which was flat versus the previous quarter. Gross margin as a percent of sales was 13%. OEM customer demand remains stable and inventory levels in the distribution channel continue with a steady correction. We are starting to see order rates from the distribution channel increase to reflect a more true demand as their inventory and mix positions continue to return to more comfortable levels. Our book-to-bill ratio was position versus last quarter and is currently above 1.30 in the quarter. We are seeing gains and increased demand for our Polymer Tantalum offerings and continue to engage with our key customers to support them in current and future potential and expected needs.

The integration of the recently acquired Tantalum powder processing facility in Carson City, now KEMET Blue Powder continues on track and we see the market continuing to stabilize and we would expect Q1 revenues to be in line with or slightly up compared to the previous quarters.

Revenue in the Americas region declined by 7.6% in Q4 to 59.4% as shipments to our distribution channel remains soft as they continue to drill down their inventories. We believe the current inventory correction is nearing an end as the inventory returns are returning to more normal levels.

POS bookings and billings improved throughout the quarter, which is a good sign. We are beginning to see recovery signs in the market as witnessed by our improving order rates and our current book-to-bill ratio of 1.22.

The automotive and commercial aviation segments continue to show strong performance and we expect this trend to continue. Going forward, we foresee our revenue increasing as the economic recovery gains more traction.

Now, let’s look at our performance by market segments. On a percentage of revenue basis, the computer segment increased 15% of the total during Q4, telecom and industrial was 18% and 24%, respectively, were both slightly down during Q4, while consumer and transportation at 10% and 21%, respectively remained stable on a percentage basis. Defense and medical at 12% revenues increased slightly compared to last quarter. For the fiscal year, defense and medical increased to 11% of total revenues. Computer and consumer 15% and 10% respectively were both off slightly while transportation at 19%, so the largest increase on a percentage basis Telecom and industry 19% and 26% respectively were slightly lower to fiscal 2011.

Now, returning to the two regions I didn’t speak about, the Asia-Pacific region, component sales for Q4 was $68 million up 3% over the previous quarter as we saw the region start to rebound from the past two quarters of self demand. We see improving demand from notebook PCs, tablets, smartphones, and telecommunication infrastructure among others. The Asia Q4 book-to-bill was 1.1 and distributor inventory is decreasing and they are planning to place some orders to handle the market’s improving condition. In particular, we starting to see extended lead times for our problem with tantalum products. The industrial and green segments are still soft, however. We are anticipating improved demand in the second half of the fiscal year. Overall, Asia demand is improving and we are seeing a strong book-to-bill.

In the [ph]entire region, we saw an 8% reduction in revenue compared to the previous quarter, throughout the quarter we continued to see signs of market conditions improving and we finished the quarter with a positive book-to-bill ratio for both our ceramic and tantalum businesses. All of our Film and Electrolytic business finished the quarter with a negative book-to-bill ratio. There were some hotspots with sign of improvement in the green energy segment for both wind and solar applications, however.

As previously discussed the largest issue impacting revenue in the second half of fiscal 2012 was volume of inventory and distribution channel. During Q4 net inventory in the channel decreased significantly. Inventory terms increased and the distributor’s re-sales for the markets improved. A book-to-bill in the distribution channel for Q4 was a healthy 109 and strengthened further as we moved into the quarter. So, in closing this has been an extremely successful year for KEMET. Revenues came in at the third highest level in our 93-year history. We’ve had a number of successful acquisitions that are stabilizing our supply chain and we have started down the road with NEC TOKIN which when complete will double the size of enterprise of the new markets and add new customers. In a few years we may look back at this past year as the beginning of a new day for KEMET 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) Your first question comes from the line of Wamsi Mohan with Bank of America/Merrill Lynch.

Wamsi Mohan - Bank of America/Merrill Lynch

Yes thank you. Hi, good morning Per, Good morning Bill.

William Lowe

Good morning, Wamsi.

Wamsi Mohan – Bank of America/Merrill Lynch

Per, you guys have taken on a lot of changes over the last few months along with the second phase of F&E restructuring, you now have the integration of Niotan propose taking NEC TOKIN. How should investors get comfortable that from an execution standpoint that this is going to go smoothly? Can you talk about some of the plans you have in place that can give people some comfort that is you bark on this really large sort of structural change in your business that things will go smoothly.

Per-Olof Loof

Let’s pick it up in pieces. If we take the F&E restructuring, we are now entering phase 2 of that process and we have all the agreements with the unions. We’ve been working with them for a number of years now to ensure that can go smoothly and we now have the facilities coming online and you should expect that to be executed basically flawlessly. We have the equipment that we need, we know where they are, we know how we are going to move them and when we are going to move them and the hiring of new individuals and the training of new individuals particularly in Skopje is going very smoothly. The activities of --that we are moving into (inaudible) from some of our facilities around Europe is also online. So, I think that part of our execution we feel we have the right people in the right places and then we have a relatively long history of knowing how to move things around and execute that without major issues.

On the supply chain initiatives that we’ve taken, the Foil plant that we acquired a year ago is now performing very well and it is an integral part of how we do business today and that has over the last year really been integrated well into the business and we will see the results continue to improve as we get more of that online.

In terms of the tantalum business and the supply chain activities with tantalum starting with the mine and also with the K-Salt processing facilities that we are putting online and including finally the powder processing facility in Carson City. We are now seeing that supply chain working. We are getting stuff out of Congo through our secured supply chain pipe, secure pipe down to Johannesburg where we are actually dealing with that in creating the K-Salt that we need for our processing of that and the final step in Carson City and the Carson City plant is today working 24/7. And we are seeing that process already benefitting the company and Bill commented that we will see our margins improve and that is to a large extent due to the fact that this activity is already coming online. So, that deals with the vertical side of the business and the restructuring side of the business.

In terms of the NEC TOKIN, as you know we have taken a very careful approach in how we actually do this. We have decided together with NEC to form the joint venture and the joint venture will be formed as soon as we come through the regulatory approval and as you know I will become the chairman of the new joint venture and we will start the process of the integration activities that we can do under the joint venture to ensure that once we take full control over this activity when we execute option – the third option here in this process. We will have work together for at least two and half years, it could be longer if we think we need to and thus we believe that we have ensured that the employees, the customers and our processes are well aligned as we go into the next step. I am very confident that we can execute this barring that anything that happens that is – that nature plays another trick in our book, but barring that I think the investor should feel comfortable that we’ve taken a very careful very well thought out approach and we have the people and the resources aligned with the need today.

Wamsi Mohan – Bank of America/Merrill Lynch

Thanks for the detailed answer Per, appreciate it. Can you also give us some more clarity around the portfolios NEC TOKIN that you currently think operates at a margin structure that you guys feel is suitable for KEMET and if there are pieces of the portfolio that are not in line with that, how should we think about how you would manage that through pricing or should we take what you did in the ceramics businesses as a guide to how you might handle some of those products that might not be at the margin profile that you expect?

Per-Olof Loof

We have already provided some detail on that in the past, of course, due to the fact that we are currently under regulatory review I think it is probably a bit premature to go into a lot of detail in that sector. But let me say this, the additional capability that NEC TOKIN has I think where we don’t play today, I think just by the mere token that no pun intended here, that they operate in areas where we are not geographically, of course we will add opportunities for our company and we’ve had clearly as you would expect customers and distribution partners asking us the same, very same question, how will this work as we go forward and that we will like to stay a little soft on how much we say at this point due to the fact that we are being reviewed for regulatory approvals.

William Lowe

I think I also want to recall that we said that from a sales organization perspective. We will remain separate organizations in the sales area while we are a joint venture it’s required. So, I think the integration efforts will take place to – as Per said, from a geographic standpoint as we look to what products -- we don’t have in certain geographies and they do, those are opportunities, but the sales organizations regarding pricing and customer issues have to remain separate while we are in joint venture.

Per-Olof Loof

But, I think also that you should take some comfort from the fact that we have spent considerable effort in lean initiatives across the company. We have over 400 people that are lean trained. We have over 130 black belts in our company. We have invested in new information technology and now we are approaching the final stages of that and that could be something we can rollout. We are investing in HR software that could be used by the combined operations as well. So, I think we have laid the foundation of becoming a real global company with the infrastructure both people, systems and processes to be able to execute.

Wamsi Mohan – Bank of America/Merrill Lynch

Okay. Thanks guys.

Operator

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

William Lowe

Good morning Sherri.

Per-Olof Loof

Good morning Sherri.

Kevin – Deutsche Bank

Hi, good morning guys. This is actually Kevin on behalf of Sherri.

William Lowe

Hi Kevin.

Per-Olof Loof

Hi Kevin.

Kevin – Deutsche Bank

Hi, how are you? So, despite some over sales this quarter SG&A was up sequentially, so I just wanted to know, how do you guys see that trending moving forward?

Per-Olof Loof

Well, I’ll answer that question. Actually, of course from a dollar standpoint it is actually lower, this quarter. If you look at the non-GAAP number, we’ve pulled out, we’ve continued to spend money on the European integration which is our oracle, rollout, as we’ve added operations that added a few more facilities for us to put that software in. We have forecasted as we said that 25 to 26 million for next quarter. A range of 24 to 26 on an average each quarter is about the number that we are looking at from a non-GAAP basis, percentage wise as revenue comes back up to where we expect it to be as we forecasted there is no revenue next quarter. The percentage of course will fall as just simple math, but from a dollar perspective it is going to remain relatively flat which we had been running which is in that 24 to $26 million range.

Kevin – Deutsche Bank

Excellent, thanks. And just on your tantalum mining efforts in the Congo, could be provide a little bit more detail there? I know you mentioned that you are getting product out of the ground. Have you seen the impact on tantalum pricing, has that come down?

Per-Olof Loof

Well, I mean, we have of course for us it will improve our margins as we said previously of course since we have now an exclusive pipe here for us. So and as I said the margin improvements we are going to see is going to be mainly in our tantalum business and mainly as a result of the efforts we are taking to in our vertical integration efforts.

William Lowe

And we’ve said in the past that we will see improvement as Per-Olof said in the margins that we have forecasted in the next quarter, but the larger impacts of the full integration of the supply chain in tantalum arrives in the latter half of the fiscal year rather than the first half. The larger improvements we expect to see in the latter half of the fiscal year.

Per-Olof Loof

But, in terms of what we are doing in this village, Kisengo and Katanga, the hospitals, or the clinics and the schools are being built and we are now starting to spend money to hire teachers. We are seeing improvements in lighting, fixtures have been put up in the village, mainly solar-powered lighting and we are working on the roads together with Kisengo Foundation, which is the charity that we are aligning ourselves with. So life in the village will continue to improve as operation started. As we have said before we will combine the artisanal mining operation that currently is there with some additional mechanized capabilities to ensure that we get the raw materials we need out of the system and we feel very comfortable with this process is going to work well. We have been added for a long time as some of you know.

Kevin – Deutsche Bank

Excellent, thanks a lot guys.

Operator

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

Amitabh Passi – UBS

Hi. Thank you. Bill, first question for you, I just wanted to clarify, did you say for the June quarter you are expecting revenues to be up modestly and then gross margin to increase 200 to 400 basis points sequentially.

William Lowe

Yeah, we’ve said 3 to 5% on the revenue using March, this March quarter as the base and then you’re right 200 to 400 basis points on the margin over this quarter on a non-GAAP.

Amitabh Passi – UBS

Okay, perfect. And is that margin increase coming predominantly just from improved topline volumes or is there other benefits that are occurring that are benefitting.

William Lowe

It is coming from a bit of mix within tantalum it’s also coming from, as Per said the coming online of the powder facility a little bit earlier and faster than we had actually thought we are going to execute. So, as Per said, it is going very well there, so we are going to see some early improvements and margins related to that where we might have seen it in the second quarter.

Per-Olof Loof

It is also a mix, we have been working diligently to improve our special projs portfolio in our tantalum space and we are seeing some of that come to fruition, this quarter and that’s also going to add, some additional revenues as well, as margin improvements to the business.

Amitabh Passi – UBS

Okay, and I just wanted to get some color on your tantalum and F&E segments, look like tantalum on comparable sales, quarter-over-quarter. Gross margins are down 300 bps, if I look at F&E, relative to the September quarter in 2010, sort of comparable sales levels, with breakeven gross margin versus lower teens back then. I’m just trying to figure out, what happened with pricing, did you feel undue pressure in these two segments, from a pricing perspective, just a little surprised to see the gross margin performance.

Per-Olof Loof

It wasn’t really pricing, it was really a couple of items that hit us in the quarter, some of the new products in the non-component business that hit the margins, significantly in the quarter. So there were, I wouldn’t call them onetime items, but in the sense they were and, that’s what affected the gross margins negatively.

Amitabh Passi – UBS

Okay

Per-Olof Loof

As you see, we knew this was going to happen and therefore we came in within, we had guided to where we actually ended up.

Amitabh Passi – UBS

Okay, and again, I don’t want to harp on this, but just the June quarter guidance looks like revenue should be back to sort of the December 2011 levels, but gross margin will still be down about 170bps. So again, just trying to understand like, how do we think about normalized margins at sort of similar revenue levels.

Per-Olof Loof

Your going to – as we --The difference in the margins is, as you can see the ceramic margins are pretty stable, and what we’re trying to do with tantalum business is sort of similar issue, get the specialized products being a bigger part of the business, which we are going to execute on starting this quarter. As well, as the need to work on integrating the supply chain and that’s where the difference really is in the price of the powder. And we’re still working off, very high powder pricing and that we had in powder costs, that we have been experiencing and as we get our own powder in line, we will see that returning to a more stable level, and therefore we can actually do two things. We can on the one hand, ensure customers that the, hopefully that the up and down pricing of tantalum will certainly cease or at least diminish, as well as ensuring that the supply chain is secured with conflict-free materials.

Amitabh Passi – UBS

Hey Per, just my last question for you. How do we reconcile some of your commentary about probably things dropping, improving trends for the rest of the year, I think many companies have indicated that on the supply chain, and yet these very cautious comments coming out of Cisco, last night, I would love to get your perspective on that.

Per-Olof Loof

I didn’t actually listen to Cisco’s comments last night, so it’s hard for me to comment specifically on that. But, what we have said is that we think that the distribution channel has bottomed out, in terms of driving down the inventory to levels where they feel comfortable. We are seeing some improvements and across the board, particularly in the U.S and Asia, and even in Europe, we see things bottoming out. We are cautiously optimistic about the rest of the year, but of course there are concerns out there, that people may feel sigh, I can’t really call it on what Cisco said, because I didn’t actually look at it.

Amitabh Passi – UBS

Okay, I appreciate it, thank you. Good luck.

Per-Olof Loof

Thank you.

Operator

Your next question comes from the line of Matt Sheerin from Stifel Nicolaus.

Per-Olof Loof

Hello Matt

Matt Sheerin - Stifel Nicolaus & Company, Inc.

Hey, good morning guys. Question on the Niotan acquisition, is there any revenue contribution in the next quarter, or is that all captive at this point?

William Lowe

No, we need every bit of powder they can manufacture.

Per-Olof Loof

Yeah, it’s all captive now.

Matt Sheerin - Stifel Nicolaus & Company, Inc.

Okay, so they basically just ended their -- terminated their agreements with the customers that they sold too, is that right?

William Lowe

Well, again we had said before, what we announced in the acquisition that, we were one of their major customers they had.

Per-Olof Loof

We were the main customers.

William Lowe

Low volume of any other customers, so it wasn’t significant for them to change Matt.

Matt Sheerin - Stifel Nicolaus & Company, Inc.

Okay and in the R&D line, should we expect that to go up a little because of Niotan, is there a lot of developing going on or should that be even?

Per-Olof Loof

Yeah, there is some development doing up there, so there will be, but it won’t be a significant. I think we have been running around 3% of revenue and that is probably why we are going to run again this year Matt.

Matt Sheerin - Stifel Nicolaus

And, on the NEC TOKIN, I know that they had manufacturing issues because of Thailand, I know there has been reports about some of that coming back, are there any opportunities before you actually close the joint venture deal to ship into their customers or into any seam, have you seen any orders there?

Per-Olof Loof

We have reached out to NEC TOKIN and are continuing to reach out and working with them to see what we can do to, help them, you know carry them to the next level, and of course we are, at this point of course in non-(inaudible) relationship, but we’ve been trying to support them particularly on the ad hoc side, and so that they can actually continue to ship to the customers.

Matt Sheerin - Stifel Nicolaus

So is the answer yes then?

Per-Olof Loof

Yeah, their answer is yes.

Matt Sheerin - Stifel Nicolaus

Okay, great and looking at your guidance, the gross margin as seen in your guidance and revenue, looks like you’re sort of hovering at breakeven, on the EBIT line, is that sort of the breakeven point now for the company around that 215 to $220 million level?

William Lowe

Now, it will probably be as we move forward with the reductions in the vertical chain, it will lower as we go through the fiscal year, is what we basically said, so yes, around this first quarter, that’s probably about what is going to be if the math works that way, but as we see further benefits coming from the vertical integration, we’ll see that breakeven point drop, relatively significantly by the time we get to the end of the fiscal year.

Matt Sheerin - Stifel Nicolaus

Okay, and just lastly, sort of going back to Wamsi’s question about execution, obviously you have got lots of moving parts and lots of heavy lifting, you went through similar issues in 2006, 2008 with acquisitions that you did, in Europe, obviously that didn’t go as well, and that put you into some even crisis situation, so what is it as you look forward, things that you’ve learnt Per from the last cycle that you went through and if there is one specific challenge ahead that perhaps makes you more cautious or lose sleep at night, what is that?

William Lowe

Poor Per answers, I’ll remind Per, just remembering the history of the timing of the acquisitions which occurred, the latter one in the latter half of ‘07, and then there was a lot of political upheaval in Italy, so our acquisition was in Italy. And so many of the reasons that the company did not start immediately on the plan, which was actually available and ready to go, was issues that was surrounded the politics in Italy, that prevented us from actually completing our negotiations with the unions and actually starting implementation. And then, as you know as we moved into the summer and fall of 2008, not related to KEMET, once again was the fall of Lehman, the fall of other financial institutions and the credit crisis. So the company did show the plans for the integration of those acquisitions for almost two years. And not necessarily for items related to KEMET. Now, I admittedly, we wanted to, as those events occurred, our cash balances were lower than they would have likely been, and we did wait to rebuild some cash up, to start up the process. But primarily, that’s one of the reasons why the organization did the start immediately, had nothing to do with KEMET. So I think, there’s a little bit of disconnect, when you look at why did the one acquisition that we had not start ,or how—why it is that still going on now, we would like to had it done by now, was really driven by forces outside of KEMET more than anything else.

Per-Olof Loof

I think, how quickly we forget what happened. We had in the first, when we first took over Arcotronics, and bill alluded to that, we had 62 strikes, had nothing to do with KEMET, all having to do with Berlusconi and his buddies when he came to power in April of 2008. And that really dampened our opportunity to do anything. And as Bill said, we basically shoved the integration activities for over two years, having said that clearly we have learnt a lot, through, than now, the 5 acquisitions that we have done. And right now, the integration of Evox-Rifa and Arcotronics going very well, that is now a seamless activity in our company. So we, of course we have learnt a lot through these activities and clearly to work with, how do we work with complex political structures and union structures and we think we have acquired some interesting skills, as a result of that, I think will be very helpful as we move into the NEC TOKIN integration.

Matt Sheerin - Stifel Nicolaus

Okay, great, thanks and best of luck.

Per-Olof Loof

Okay thank you.

Operator

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

Hamed Khorsand - BWS Financial

Hi, good morning guys. My first question was regarding your tantalum utilization rate, what was that this past quarter?

Per-Olof Loof

Why utilization of tantalum is, you can sort of look at it as, at the height of the revenue cycle, we probably did a 125 million tantalum and now, we did 90, so you can sort of do the math, the polymer utilization is very high at the moment. Probably as much as we can do, going into that we’ll be doing this quarter. We’re increasing capacity in that business significantly as well to meet the demand, and our MnO2, which is a highly distribution driven business for us, that is off but it’s still not at a 100% utilization, probably in the 80, 78 to 80% rate at this point.

Hamed Khorsand - BWS Financial

Alright, what I’m trying to lead to, trying to figure out given that you said earlier, book-to- bills at 1.3, for tantalum, what kind of rate we would see revenue return to more of the peak numbers that we had seen over the last few quarters before this inventory downturn.

Per-Olof Loof

You know Bill gave you a number as to where revenue increase is going to be, and I would say that most of that will happen in our tantalum business.

Hamed Khorsand – BWS Financial

Is there any geographies that you would expect it to be more so than others, on Americas

Per-Olof Loof

I think the Americas will be Asian based, because a lot of it is polymer based and that’s you know, it’s for Western OEM’s but when the manufacture actually takes place in Asia.

Hamed Khorsand – BWS Financial

Okay, my last question is going forward, just assuming that we do see this recovery with the book-to- bill being so high would your gross margin go up appropriately?

Per-Olof Loof

We guided to 200 to 400 basis points improvement this quarter.

Hamed Khorsand – BWS Financial

Beyond this quarter, this is looking out

William Lowe

Our comments going out without using numbers is what we’ve said that we expect at the vertical integration of the tantalum business. We’ll continue to improve margins as we get into the ladder half of the fiscal year, where the savings that we have all delineated will start to come to fruition on a full run rate basis,

Hamed Khorsand – BWS Financial

Okay thank you

William Lowe

Alright you’re welcome.

Operator

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

William Lowe

Good morning Tony.

Anthony Kure – KeyBanc Capital Markets

Hey good morning gentlemen. You guys are much in several book-to- bill, or book-to-bills by segment, just wondering of you have an all in total company book-to-bill and if you said that, I apologize, if I missed it, but just trying to see what the overall book-to-bill was, maybe during the fourth quarter and then where it stands now?

Per-Olof Loof

The book-to-bill was slightly positive existing Q4 and is now running at 121.

Anthony Kure – KeyBanc Capital Markets

121 you said.

Per-Olof Loof

Yeah.

William Lowe

As of this morning actually.

Anthony Kure – KeyBanc Capital Markets

As far as Europe goes, can you just talk about how the quarter progressed that month, in other words how did January obviously compared to March and then where do we stand now, have you seen any material change in demand trends in Europe over the last recent period?

Per-Olof Loof

I think on that European side, what we can say is that the book-to-bill ratio for the quarter is slightly above one, so we’re seeing it returning even in Europe. They are much higher in America as in Asia, but in Europe it’s more than 105 at this point. So, I think we are seeing Europe bottoming out, as well, but of course they took a big beating in terms where they were at the height of their performance, for reasons that are well known or well publicized.

Anthony Kure – KeyBanc Capital Markets

Okay, and then could you just touch on machining and how that’s going to impact, impact this current quarter, are you expecting the absence of machine building or should we see some margin improvement because of machinery, can we talk a little bit about that?

Per-Olof Loof

We are expecting machining to be pretty stable from a revenue perspective in the quarter at pretty decent levels and we are expecting the margins to behave better than they did this last quarter.

Anthony Kure – KeyBanc Capital Markets

Okay. And then, I guess my last question is sort of an extension of some of the other folks’ questions. If we look at – normally you have to see sequential improvement as the year progresses or at least maybe what’s normal is for the second quarter to be up a little bit from the first. If we have all these things coming online from a cost improvements standpoint, why wouldn’t we see mid-teens type EBIT margins, operating margins as we progress through the year considering you were about 15% or 16% at 250 back in fiscal 2011. What’s different about that environment back in fiscal 2011 versus fiscal ’13? Obviously, pricing was probably better than too, but where can we take EBIT margins now as revenues start to rebound and all these improvements come through?

Per-Olof Loof

We don’t really like to give guidance way out in advance because there are too many things that can happen. But of course the actions we are taking – significant actions we are taking on the cost side of the equation here relative to the integration of the supply chain for Tantalum, in particular. We will have – assuming that we can – that the market doesn’t fall off the cliff, but we will have significant –

William Lowe

Yes, Tony, I think I’d point you back to our public comments that we made regarding what we expect the benefit to be from the vertical integration on a full run rate basis when we announced that acquisition. I think if you then take that and bake into model you can determine your own impact on margins as you get further out in the future, and I think that’s why we gave that guidance on that basis. Here is what we expected. As we completed it and what the full run rate basis would be as we excited this full fiscal year. Of course the question always is does that benefit start to happen earlier versus the time we projected it. But I think that’s what I would point you to try to figure out what those future impacts are and we have provided that guidance on a dollar basis.

Per-Olof Loof

And what I think what Bill alluded too when he talked about the guidance for the current quarter is that the integration efforts relative to the powder activities is going faster, better and more than we had anticipated at this point and the cycle.

Anthony Kure – KeyBanc Capital Markets

Okay. Thank you.

Operator

We have a follow-up question from Wamsi Mohan with Bank of America/Merrill Lynch.

Per-Olof Loof

Okay, Wamsi.

Wamsi Mohan - Bank of America/Merrill Lynch

Yes, thanks for taking my follow-up. Bill, from a cost prospect, if you had almost $5 million in cost associated with ERP integration and then the plan start-up, how much longer will the ERP integration take? And second question is, is NEC TOKIN also setup for a similar ERP or would they be incremental cost when we do that integration? Thank you.

William Lowe

Well, I think for the next several quarters we will be running about the same European integration expense which has been running somewhere between – on an annual basis it probably ran about $7 million this past year. I think this next fiscal year we will see a similar number, $5 million to $7 million as we finish all of our plants, and of course, when we started this project over time we have actually added some facility we’ve had to put on the list to actually implement to the Oracle implementation which KEMET Blue Powder for instance (inaudible) implant, which is the Film plant in Macedonia. So, we have added a few but we expect this fiscal year to be more or less completed with KEMET. What the integration teams decide is the appropriate path with NEC and will be determined once we actually get together. They are not on the same platform we are. And we will turn into [ph] what’s the best way to approach that from both the cost perspective, information perspective as we have an opportunity to actually get together once we have closed the transaction.

Per-Olof Loof

Clearly, we have a view as to what we need to do. But I think it’s a little premature to talk about it before the transaction is closed on the JVs and operations. But we will come back to you guys with that as soon as the JVs and operation.

Wamsi Mohan - Bank of America/Merrill Lynch

Thank guys. And the expected closing still is at some point in 2Q?

Per-Olof Loof

At some point in our 2Q, yes.

Wamsi Mohan - Bank of America/Merrill Lynch

Okay. Thank you very much.

Per-Olof Loof

Alright.

Operator

(Operator Instructions) We have a follow-up from Matt Sheerin with Stifel Nicolaus.

Per-Olof Loof

Hi Matt.

Matt Sheerin – Stifel Nicolaus

Just as question, I didn’t get the gross margin for the Tantalum segment, what was that?

William Lowe

It was almost – just slightly under 15% gross margin.

Matt Sheerin – Stifel Nicolaus

Slightly under 15%. Do you expect that to improve in line with that corporate number you gave?

William Lowe

Yes, it’s going to be the primary driver of that margin change.

Matt Sheerin – Stifel Nicolaus

That’s primarily why I guess a combination of volumes but more so because of the --?

William Lowe

Volume mix and the powder.

Matt Sheerin – Stifel Nicolaus

Got you. Okay, great thanks.

William Lowe

Alright.

Per-Olof Loof

Thank you, Matt.

Operator

There are no further questions at this time. Are there any closing remarks?

Per-Olof Loof

Well, we appreciate you guys being on the call this morning and thank you for your interest in our company and we look forward to speaking with you again after Q1. All the best. Thank you.

Operator

Thank you. This does conclude today’s conference call, you may now disconnect.

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