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Executives

Dean W. Dimke – Director-Investor Communications

Per-Olof Lööf – Chief Executive Officer & Director

William M. Lowe – Chief Financial Officer & Executive Vice President

Analysts

Wamsi Mohan – Bank of America Merrill Lynch

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Hamed Khorsand – BWS Financial, Inc.

Amitabh Passi – UBS Securities LLC

Anthony Kure – KeyBanc Capital Markets

Marco Rodriguez – Stonegate Securities, Inc.

James Gentile – Newland Capital Management LLC

KEMET Corporation (KEM) F1Q13 Earnings Call July 26, 2012 9:00 AM ET

Operator

Good morning. My name is Celia, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the KEMET Announces Earnings for June 2012 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

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

Dean W. Dimke

Thank you, Celia. This is Dean Dimke, Senior Director of Marketing Communications and Investor Relations. Good morning and welcome to KEMET’s conference call to discuss our financial results for our first quarter for fiscal year 2013. On the call with me today is Per-Olof, 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 first quarter conference call link. That will bring up a few slides that we will call to your attention as we cover those topics.

Before we begin, we would like to advise you that all statements that address expectations or projections about the future are forward-looking statements. Some of these statements include words such as expects, anticipates, plans, intends, projects, and indicates. Although, they reflect our current expectations, these statements are not guarantees of future performance, but involve a number of risks, uncertainties and assumptions. Please refer to our 10-Ks, 10-Qs, and recent registration statements filings for additional information on risks and uncertainties.

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

Per-Olof Lööf

Thank you, Dean, and good morning everyone. Our first quarter of fiscal 2013 saw our net sales grow to $223.6 million, which was an increase of approximately $13 million over the last quarter.

Our adjusted EBITDA for the quarter was $14.1 million. The markets this quarter have still been on the soft side, but we do see demand picking up with closing book-to-bill at 1.16. The joint venture with NEC TOKIN and ourselves has received regulatory clearance from the European Commission under the European Union Merger regulation for our proposed acquisition of a 34% interest in NEC TOKIN by ourselves.

As previously announced on March 12, 2012, KEMET entered into a definitive agreement to acquire this interest for $50 million. The transaction remains subject to satisfaction of customary closing conditions, including receipt of required regulatory approval in China. While a definite closing date cannot be determined, we continue to expect that the transaction will close during our second fiscal quarter, ending September 30, 2012.

As a reminder, the transaction comprises three major steps. First, we’ll form a JV with NEC by acquiring a 34% equity stake in NEC TOKIN for the payment of $50 million. The next step will be to increase that equity ownership stake to 49% for an additional $50 million.

The third and final stake will be to acquire the remaining 51%, giving us a 100% economic ownership, which will be based on a multiple of NTs performance at that time. This structure is designed to allow us to align all stakeholders KEMET, NEC & NT towards the successful integration, rebuilding, restructuring and continued optimization of NEC TOKIN in preparation and anticipation of the final step in this transaction.

This past quarter, we continued to see progress in our actions to secure and stabilize our supply chain through our stated strategy of vertical integration. As you may recall, we bought 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 Tantalum Resources in Johannesburg, South Africa, completed our closed-pipe conflict-free vertically integrated tantalum supply chain. I’m delighted to say that we now are seeing parts coming out of our manufacturing plants made from ore that has gone through this closed pipeline.

Additionally, we’re seeing real progress being made in our Making Africa Work initiative that – with regard to the social responsibility we’re taking with schools and hospitals now being built adding to the infrastructure in the community. Before I go into detail regarding the performance of over individual business groups and regions, I’ll turn it over to Bill to review our financials for the quarter. Bill?

William M. Lowe

Thanks, Per, and good morning, everyone. I will begin my review on Slide 3, if you are following along in the slide deck that was provided on our website.

Net sales of $223.6 million were up 6% over the prior quarter of March 2012 of $210.7 million, which exceeded our forecast range of 3% to 5%, and our non-GAAP gross margin as a percentage of sales increased to 15.2% compared to 14.1% in the prior quarter, driven primarily by our Tantalum business unit.

We are not, however, satisfied with the progress of our improvement in the operating margins. And as you know, we had previously put in place action plans to improve our cost structure and increase our gross margins through vertical integration of our supply chain. And we also continue to restructure our F&E business segment.

We are comfortable with our previous estimates that in the back half of this fiscal year, that F&E will improve their cost structure by approximately $3.5 million and the Tantalum group will see approximately $10 million to $12 million improvement in gross margin dollars over the last two quarters by lowering the cost of raw materials.

Today, we announced further actions to improve our operating margins for the remainder of the fiscal year. The company will take various actions, including a reduction in force of approximately 420 and achieve additional cost savings this fiscal year of approximately $16 million. We expect that we’ll see approximately $2 million to $3 million in savings in the September quarter, and approximately $6 million in each of the third and fourth quarter this fiscal year.

As we exit this fiscal year, the annual run-rate for these actions therefore will generate approximately $25 million in annual savings. We will take a charge of approximately $8 million to $9 million during this fiscal year, of which we expect approximately $7 million will be recorded during this current quarter ending September 30, 2012 related to these actions.

Turning now to Slide 4, our adjusted non-GAAP SG&A expenses were $24.2 million or about $3.1 million lower than last year’s same quarter. And looking forward to next quarter, our expectations are that SG&A expense should be in the range of $23.5 million to $24 million as some of the cost reductions take effect from our actions announced today.

On Slide 5, our GAAP net loss was $17.8 million or $0.40 per basic share for the quarter. Referring to Slide 6 now, our non-GAAP adjusted net loss was $8.8 million or $0.20 per share for the quarter, and adjusted EBITDA was $14.1 million.

On Slide 8, capital expenditures during the quarter were $13.1 million in line with our forecast of $13 million to $15 million, and we expect capital expenditures for the September fiscal quarter to be in the range of $13 million to $20 million, and our bank revolver continues to remain undrawn at this time.

Looking out to the next quarter, which ends September 30, we see relatively – revenue relatively flat versus the June quarter. And as a reminder, traditionally, we expect this quarter to vary slightly downward in revenue because of the holiday periods in Europe. Europe is providing some headwind, both in the September quarter and this fiscal year, but regardless we believe that revenue will hold in the general range we reported this current quarter.

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

Per-Olof Lööf

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

I’ll start with Film & Electrolytics; revenue in Q1 was $62.9 million, down approximately 10% versus Q4 of last year. The revenue decline was driven by continued softness in Europe and in our DC film segment. Global demand for these components, particularly with regards to DC film, remained soft during Q1.

Gross margin in Q1 was 1.2%, as lower component volumes negatively impact fixed costs absorption. Our focus on material cost and restructuring initiatives in this business continues. We are taking advantage of the temporary decline in volume to accelerate these activities. The new order rate in Q1 was up 20% versus the previous quarter, however, improving the book-to-bill to 0.95 for Q1. The current backlog is approximately $70 million as we move forward into Q2.

In our Ceramic business, Q1 revenue was up by 1.5% over the previous quarter to $51.5 million. Demand remains stable as channel inventory has normalized. Gross margin results remain strong at 28.2%, but were down slightly compared to the previous quarter. This decrease is largely driven by market ASP pressures on commodity products followed by regional and product mix effects. The Q1 book-to-bill ratio was 1 and backlog has increased slightly as we move into Q2. Capacity utilization for Q1 remains stable at approximately 75%.

On the Tantalum side of the business, we ended Q1 at $109.2 million, that’s 21% above the last quarter’s numbers. Gross margin as a percentage of net sales rose to 17.2%. We were responsive to quarter-over-quarter increases in distribution and OEM channels, mainly for our polymer and specialty product lines.

Demand in the EMS channel remain stable and inventory levels in the distribution channel continue the steady correction with order rates flattening to reflect a more true demand as their inventory and mix positions continue to return to a comfortable level.

We closed the quarter with a positive book-to-bill ratio. We continue seeing gains and a strong demand for our polymer tantalum offerings and continue to engage with our key customers to support them in the current and future needs.

In the Asia-Pacific region, component sales for Q1 were $78 million, up 16% over the previous quarter as we saw the region start to rebound from the past two quarters. We see significant improvement in demand from smartphones, telecom infrastructure and power management.

Industrial, auto and green segments are still soft, with the economic slowdown in China and India impacting our business. Asia book-to-bill was 1.1. Distributor (inaudible) tantalum inventory is decreasing and they are planning to place with new orders to handle the market boosting condition. In short, we still expect Asia-Pacific Q2 sales relatively higher than Q1 by another 5% to 6%.

In the EMEA region, we saw revenue of 79.4%, an increase of 1.9% compared to the previous quarter. All of the EMEA market remains under the cloud of uncertainty, brought about by the Euro Zone economic crisis. The book-to-bill ratio for the quarter finished close to 1 and improved throughout the quarter.

From a channel perspective, the distribution markets started to show signs of recovery and some reinvestment in inventory. Segment wise, telecom remained slower, but automotive was stable. There was some signs of improvement within specific areas of the green energy market.

Revenue in the Americas region increased by 1.8% to $60.5 million in Q1 driven by solid automotive demand and restocking by distribution channel. Overall, market conditions continue to be challenging and end demand remains sluggish as customers remain cautious due to the uncertain macroeconomic landscape.

Inventory in the distribution channel continue to decline as POS shipments held up well. We ended Q1 with a positive book-to-bill of 1.05 and the positive booking momentum has continued into July as our book-to-bill ratio currently stands at 1.38.

Let’s have a look at our performance by segment. On a percentage of revenue basis telecom and industrial segments increased slightly to 20% and 25% of our revenues, computing at 15% and consumer at 10% remained stable on a percentage basis. With automotive, or transportation remaining strong at 20%, defense and medical at a combined 10% of revenues, just slightly down compared to last quarter.

In closing, we continue to see a world economy that is slow, and in Europe that is specifically being a drag in our business. We are encouraged that a good sales rate indicates the September quarter, which is typically lower than June, would appear instead to be on par or slightly above June.

However, as Bill said in his remarks, we’re not sitting out and waiting for the market to come to us, we’re taking decisive actions today, in addition to those previously announced to reduce our cost structure in the anticipation that the current level of business continues a bit longer. Returning to profitability even in the slow economic time is a must and the management team is focused on this.

This concludes our prepared remarks. And we’ll be happy to respond to any of your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Wamsi Mohan, Bank of America.

Wamsi Mohan – Bank of America/Merrill Lynch

Yes, good morning. Hi, Per. Hi, Bill.

Per-Olof Lööf

Good morning, Wamsi.

Wamsi Mohan – Bank of America/Merrill Lynch

Good morning. Can you talk about the restructuring you announced, it appears as though the employees are in higher-cost regions just doing some back-of-the-envelope math on that. What segments are they serving? I’m assuming there is no overlap between this and the previously announced F&E restructuring, so which segment should see the most benefit from this most recent restructuring you’ve announced?

Per-Olof Lööf

Clearly, if you look at our business as we talked about it today, you saw our Tantalum business being very strong. We were pleasantly surprised at how strong the revenue came back. And as you – and we’re also very pleasantly surprised at the vertical integration activities, it’s going as planned or even better as planned. And we’ll see that benefit from our P&L perspective start to kick in already in this quarter. But clearly, the actions we are taking now is on top of what’s already been announced. So the numbers that have been out there relative to what we previously discussed is still valid and this should be added to those numbers. And it affects a number of overhead functions across the company and across the globe, but clearly, in the F&E segment, a lot of these actions will take place. And while we’re actually able to do now is to speed up the restructuring efforts that were planned for later quarters and doing it sooner, as we need to improve our business and get back to profitability at lower revenue levels, if the current market conditions stay where they are. I think Bill, do you want to make…?

William M. Lowe

No, I think that’s a good comment.

Wamsi Mohan – Bank of America/Merrill Lynch

Okay, thanks. And then in your margin improvement in Tantalum, I think you just mentioned, you’re seeing better-than, faster-than-expected progress in the vertical integration. So, how much of that margin improvement sequentially was driven by KEMET Blue Powder versus higher volumes?

Per-Olof Lööf

Zero, zero, this quarter.

William M. Lowe

Wamsi, as we had previously said that we didn’t expect to see anything from that this quarter, because it is captured up in inventory. We’ll start to see that a little bit in the next quarter, and then the third quarter we’ll have a much stepped up, quite a bit of amount from Q2 to Q3. So, as we’ve said, the way inventory accounting works have captured the cash savings if you will for this quarter, which was not large, let’s call it a $1.5 million that we’ll roll into next quarter. And then, we’ll see a step up into Q3, and that’s what we’ve been saying all along. So, as – for my remarks and my formal remarks, we’ll see them exiting the year as we previously said with about a $10 million delta from where they are today.

Wamsi Mohan – Bank of America/Merrill Lynch

Okay, that’s helpful. And last one from me here. What are you seeing in Tantalum ore pricing, we’ve heard that it has moved up in the month of July? Can you confirm that, if that is really the case? And you’ve mentioned somewhat flattish from a overall revenue perspective, what’s your expectations for Tantalum gross margins? Thank you. In September.

Per-Olof Lööf

On the ore price, that of course, is part of – ore price fluctuate somewhat. We have a bit more ability to be in control of that. So that affects us maybe a little less than some others possibly. In terms of the business in Tantalum, we continue to see strength in that business. And particularly in the polymer line, which basically is sold out, and we continue to see strength there, and we will continue to invest additional capacity in the polymer line to meet the demand as we see demand improving in that segment, quite dramatically actually.

Wamsi Mohan – Bank of America/Merrill Lynch

Okay, thanks Per.

Operator

Your next question is from Matt Sheerin from Stifel Nicolaus.

Per-Olof Lööf

Good morning, Matt.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Yeah, hi good morning guys. So, on that F&E business, where do we stand in terms of the manufacturing transfers that you’ve been going through to lower cost geographies?

Per-Olof Lööf

Okay, we closed one plant, that’s beginning of July, in Italy. And the equipment there is on its way, some is still going to stay in Italy, as we continue this transaction, and then the rest is going to Macedonia, to Skopje. And we have started some production of filters in Macedonia as we speak, and the rest will be – is, it’s on its way from Italy to Macedonia. So that plant is actually looking very good, and we actually believe we can start production little bit quicker than we have anticipated.

In terms of the facility in Italy, in particular that is – in construction right now and that is also doing well and we expect that to come on and play as expected. So, in Q1 of next year all of those moves will be completed.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Okay.

Per-Olof Lööf

Everything that should go out of Italy is out of Italy and the thing that should stay is in the new facility and the other three facilities will be vacated.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Okay, so when you’re complete with that restructuring and the new – the plant transfers, what kind of operating margin are you targeting? Or even growth margin because you’re not, I mean, you, really basically break even and granted your revenue is down substantially 30%, 40% year-over-year, but is there a sort of a revenue threshold that you need to produce let’s say, up 15% gross margin in that business when all is said and done?

William M. Lowe

Well, if you run the numbers, what we have and what we have announced previously and what we announced today and as I said, the biggest portion of this, was additional restructuring will affect F&E of course. So, our target is to run a profitable business at these revenue levels, so that’s really been the target all along, and that’s why of course we need to be able to be more flexible as demand goes up and down.

We are seeing some increase in orders in that segment though, so although this quarter is also impacted by heavy European presence for us, and the vacation that’s likely to happen in August, and we’ll shut down lot of activities in Europe for a couple of weeks at least.

But we see this business coming back from a volume perspective eventually, and the target is that we should be profitable at the levels we’re at right now. And that’s why we’re taking all these actions and of course, it takes a lot of time to do this. Actually, we’ve talked about this before.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Okay.

William M. Lowe

By the end of this year, it should be finished.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Okay, and Per your original – your opening statement, I believe you talked about a book-to-bill of 1.16, but then it sounded like the book-to-bill is in different regions and segments were just around one give or take and then guiding flattish, right?

Per-Olof Lööf

No, no, no, we’re guiding flattish. The book-to-bill is 1.16. And I don’t think – I may not have added. I may not have talked about all of them, but some of them are more than others in the U.S. for instance, the book-to-bill is almost 1.4 as we speak. So if you add it all together, its 1.16. And if you look at the business today, as I’m looking at it this morning, we are running at a higher revenue rate than we were last quarter. Now, but I will have to preface that with August, so we’ll – and then of course we have September, which typically is very strong, so that’s why we’re guiding to flattish, but I would say flattish with an opportunity for some upside, but flattish is what we’re guiding to.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Okay. And given that you’ve got some of these cost savings rolling in this quarter, do you expect any kind of improvement in gross margin?

Per-Olof Lööf

Yes, of course, of course. We expect to see a little bit of improvement in the vertical integration. What we actually produced last quarter, we’ll roll into this quarter. But that’s not going to be huge, yet. It will be much bigger in Q3 and then of course we’ll be at a run rate of $10 million around in Q4.

William M. Lowe

Yeah, I think Matt, in my formal comments I’d said, we’d see $2 million or $3 million potentially cost savings resulting from these actions in this – because we only have two months remaining in the quarter. So, that’s what we’ll see. It just starts to kick-off. So, in addition to those benefit as Per said, there’s a small benefit from the vertical integration that comes in the second quarter as well.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Okay. So, you still expect to post an operating loss and a EPS loss probably, right?

William M. Lowe

Well, at this level and at the improvement of margins, probably that’s – that would probably be how the math would work out. But that’s the reason why we’re taking actions, so, as we get in the quarters three and four, we’re out of that situation.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Gotcha.

Per-Olof Lööf

I mean, why we’re saying is at these levels, we need to produce a bottom line profit.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Sure.

William M. Lowe

Assuming that this level of economic activity stays for a few quarters, we want to be positive, and I believe our shareholders expect us to be positive at this level unless that’s what we’re trying to do.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

And then on NEC, is there anything you can share with us in terms of what you’re seeing in their fundamentals out? I asked that question, because once you close the deal, you will be recognizing the percentage of their, either gain or loss. And so, what I’m getting at is – is it likely that there’s going to be some sort of loss that you’re going to be incurring on your other income line for the next two or three quarters as NEC recovers rebuilds in Thailand et cetera?

William M. Lowe

I think we have said, I think fairly consistently Matt that we would expect that that’s the possibility as they’re ramping up their new facility with start-up cost et cetera. So, we haven’t put a figure on that, but we’ve said that that’s a possibility in the first few quarters, that could occur. But it was an emphasis that says that’s not a cash impact to us. So, while that might happen, that does not affect our balance sheet from that perspective. But it may not be a negative, but from the standpoint that their facility is just now starting up and they’ll have start-up costs that are still rolling through, it’s certainly a possibility.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Okay, and just, sorry for all the questions, but one last, if I may. Just on this ERP rollout and the associated cost, how far along we are – are we on that path and when do you expect to be done?

Per-Olof Lööf

We expect it to be done in the next six, seven months or so. So, I mean we’re basically doing – we’re doing the rollouts in the middle months every quarter. We’re taking three plants a quarter and I think we’ve got six or seven plants still…

William M. Lowe

I think the plant takes us through the end of the fiscal year basically, into maybe on April kind of timeframe in the next calendar.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

And what’s the platform that you’re on?

Per-Olof Lööf

Oracle.

William M. Lowe

We’re on Oracle.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Oracle. Okay, thanks a lot.

Per-Olof Lööf

Thank you, Matt.

Operator

Your next question is from Hamed Khorsand from BWS Financial.

Hamed Khorsand – BWS Financial, Inc.

Yeah, good morning, guys.

Per-Olof Lööf

Good morning.

Hamed Khorsand – BWS Financial, Inc.

Just a couple of questions here. One is, could you just talk about your lead times and you’ve been talking about inventory correction channel for a while now. And just if there has been any improvement on that front for you?

Per-Olof Lööf

Yeah, the inventory is down in the distri channel and we see that continue to come down. So, that means that we’re eating – our distri partners are eating into their inventory, which of course, is good news for us as well. Lead times are a little different from different – between different groups. But they vary from eight to 12 weeks basically today.

Hamed Khorsand – BWS Financial, Inc.

Okay. I’m asking that because your inventory line increased sequentially?

William M. Lowe

It increased because we’re feeding – we’re actually – it will increase now because of what we’re doing in the vertical integration.

Per-Olof Lööf

Yeah.

William M. Lowe

Not in the inventory of our channels.

Per-Olof Lööf

I think, well – that inventory is the result of us, getting the pipeline full. We expected inventories over the course of the fiscal year as we get fully – integration fully up to speed, will actually decline. But right now, it’s increased a bit. But that’s our inventory, that’s not distribution channel inventory.

Hamed Khorsand – BWS Financial, Inc.

Okay.

William M. Lowe

And overall inventory increased about $4 million quarter-over-quarter primarily as result of the tantalum…

Per-Olof Lööf

And then we’re down in the other segments and up in tantalum for a particular reason.

Hamed Khorsand – BWS Financial, Inc.

Right. And I’m just looking…

Per-Olof Lööf

Correct yourself, as the channel gets, as the integration process starts in full speed.

Hamed Khorsand – BWS Financial, Inc.

Okay, and just looking at the financial metrics, it just seems as though the focus here now is really on the operating line, not any more on the gross margin line. I mean should that – is that how should we – we should take as you’ve already done everything you can from the – on the gross margin line?

Per-Olof Lööf

No, we’re not, no, no, no.

William M. Lowe

No, I don’t think we’re saying that. We’re saying, we’re taking the actions that were announced today, but of course, we will continue to monitor where that takes us.

Per-Olof Lööf

The actions we have taken relative to or – that we have announced that is going in starting now and particularly in the vertical integration space, so it’s still valid. So, the numbers that we put out there before are still – so you should actually take what was out there before and add what we just said, which is that annualized $25 million profit.

Hamed Khorsand – BWS Financial, Inc.

Okay.

Per-Olof Lööf

Thanks.

Hamed Khorsand – BWS Financial, Inc.

Thank you.

Operator

(Operator Instructions) Your next question is from Amitabh Passi, UBS.

Amitabh Passi – UBS Securities LLC

Hi, thank you. The first question for you, just wanted to confirm is the implied guidance for gross margin for the September quarter in the 16%, 17% range? I missed that.

William M. Lowe

We actually didn’t guide, I don’t think to the margin number. We guided to a revenue number.

Amitabh Passi – UBS Securities LLC

But you said you expected $2 million to $3 million of improvement.

William M. Lowe

Yeah, yeah.

Amitabh Passi – UBS Securities LLC

Okay, okay. And then, can you help me understand what you’re expecting, since we would be assuming revenue staying at the comparable levels. As we move into the December quarter, what kind of step up are you expecting just from the vertical integration activities?

William M. Lowe

We are expecting about $7 million or so from the vertical integration in the December quarter, moving to $10 million in the March quarter. And then we’re expecting, as we said today, a $6 million impact on the actions we’re taking. And adding those two, you get to $13 million.

Amitabh Passi – UBS Securities LLC

Got it, thank you. And then Per, just a quick one for you, book-to-bill in North America, you said, 1.4. Where is that strength coming from? And is that from your perspective sustainable as we move through the rest of the year?

Per-Olof Lööf

Well, I think as these orders go into revenue, I think that that book-to-bill will come down. But we’re seeing strength in several segments, automotive; we’re seeing strength in medical; we’re seeing strength in telecom as well. So, it’s pretty much across the board in the Americas. And so we take a great comfort in that. And then typically for us anyway, the U.S. tends to lead the pack out of the slump, so to speak. And the Europe is the laggard both going in and coming out.

Amitabh Passi – UBS Securities LLC

No, I appreciate it. And then just final one from me, ceramic gross margins, I mean kind of in this $50 million, $55 million level, we’ve seen margins go from 34% to 28%. Just wondering, how do we think of normalized margins, do you get back into sort of the mid-30s or is it more 20% to 30% range?

Per-Olof Lööf

Well, I think we’ve said consistently that it’s not going to set – it’s going to be in that range of 28% to 31% kind of, depending on the quarter, depending on the mix.

Amitabh Passi – UBS Securities LLC

Okay.

Per-Olof Lööf

We fall within the range that we’ve been talking about consistently.

Amitabh Passi – UBS Securities LLC

Okay, I appreciate it. Thank you.

Operator

Your next question is from Tony Kure from KeyBanc.

Per-Olof Lööf

Good morning, Tony.

William M. Lowe

Good morning, Tony.

Anthony Kure – KeyBanc Capital Markets

Hey, good morning, guys. Just a couple of quick ones. First, as far as Europe goes and I guess the same question for China specifically, can you just talk about how the quarter progressed through the months and then maybe how that contrasts with the current trends for both regions?

Per-Olof Lööf

Well, I think the – we saw April in Europe as you know, it’s full of holidays. It’s almost like in August, except you have – there is one holiday after the others. So, there’s a lot of days where there is little action. But, we saw Europe strengthening into the quarter, and we see it – it is an opportunity we think to – that Europe will actually stay where it is. Clearly, we expect Europe to eventually kick back in again. But I think, it’s – today as we are looking, we are basically having a stable business in the European arena at this point.

Anthony Kure – KeyBanc Capital Markets

Okay. Maybe the same sort of color on China, if you can?

Per-Olof Lööf

Yeah, China is up, the Asian business is up, and we expect Asia to be up this quarter over last.

Anthony Kure – KeyBanc Capital Markets

Okay. And then maybe…

Per-Olof Lööf

We’re saying some – some of this – it’s a mix between componentry and machining as well, as you know, right, and of course, machining is a small business, but on the margin it has an impact. So, we think components business will be up, because we know that machining is going to be down. That’s how we get to the, black field if you like, growth pattern here.

Anthony Kure – KeyBanc Capital Markets

Okay. And then, as far as the polymer business goes, you mentioned it a couple of times, and we’ve talked – you’ve talked about it in the past. Could you just maybe put up some scale at how big that business is now, and what end markets are being served by those items?

Per-Olof Lööf

Well for us, polymer was almost always the smallest of the businesses in Tantalum, and it’s now probably the bigger of it – of the businesses. So we’re going to see polymer sales, from a dollar perspective, increase, not in volume, not in piece counts, of course, but in volume – dollar volume.

So, it’s becoming a very significant business for us, and as I’ve said before, we are – we have increased our capacity in that space, mainly by converting MnO2 capability to polymer, and adding the polymerization equipment to be able to do that. But basically we’re seeing the polymer business being very strong.

Anthony Kure – KeyBanc Capital Markets

And just remind me, that’s for higher-end sort of electronic applications. Is that right?

Per-Olof Lööf

Particularly for higher-end electronics, and computing, and telecommunications in particular.

Anthony Kure – KeyBanc Capital Markets

Okay. And then, excuse me, as far the Niotan, the powder, as it rolls through the supply chain.

Per-Olof Lööf

That’s the Blue Powder.

Anthony Kure – KeyBanc Capital Markets

I’m sorry, Blue Powder, sorry. As that sort of progresses here, does your cost savings anticipate actually selling? I don’t know if you can even call it cost savings, but does your progression of gross margin improvement assume selling powder to others or is that simply for the internal use?

Per-Olof Lööf

No, that does not include any sales. We assume that we will need it. Although we’re not foreign to selling it, if our colleagues in the market would want to do that, we will look at that, of course, if we have the capacity to do so. At this point, we need the facility to produce for ourselves.

Anthony Kure – KeyBanc Capital Markets

Okay, great. Thank you.

Per-Olof Lööf

Thank you.

Operator

(Operator Instructions) Your next question is from Marco Rodriguez from Stonegate Security.

Per-Olof Lööf

Hi, Marco.

Marco Rodriguez – Stonegate Securities, Inc.

Hi, good morning, guys. Thanks for taking my questions. Looking at the overall business, I mean you’re like – we’re talking about the book-to-bill a little bit earlier being roughly about 1.1, 1.2 from a general perspective. But at the same time, when you kind of look at the value chain, a lot of the distributors, OEMs, semi players, we’re kind of operating at high days of inventory when you compare with seven year averages. Can you kind of discuss a little bit about what you’re seeing there on the value chain?

Per-Olof Lööf

Well, in terms of the distri inventory, which is the one that impacts us the most, we have – we saw them being high, which we’ve been talking about before, and we’re seeing them coming down. So, we are eating into – our distri partners are eating into their inventory at this point. So the inventories is in the distri channel are coming down across the board, not just in the U.S., but in Europe and in Asia as well.

Marco Rodriguez – Stonegate Securities, Inc.

Do you have any sort of feel as far as when you think they return to more normalized levels?

Per-Olof Lööf

I think they’re getting very close to where they need to. So now – now it’s really, as they sell, they need to replenish. It’s kind of what we’re seeing at this point. So the POS needs to – the stuff going out needs to be put back on the shelves.

Marco Rodriguez – Stonegate Securities, Inc.

Okay. And then just kind of given the overall weak economic environment that’s out there, are you guys doing anything different from a sales perspective, implementing any kind of different strategies?

Per-Olof Lööf

Well, we’re being very aggressive. We try to be very responsive to our customers. We’re continuing to invest in our OEM activities. We continue to focus in on our specialty business, which typically draws a better margin. And we’re being – really focusing in on the major accounts where we think we can make a huge difference with our global network and the way we do business. And we’re actually seeing some positive signs, as we go through that.

Clearly, the European scene is for us more of confidence. We don’t sell much into Greece and Portugal, as you can probably understand. But, clearly the European scene needs to be cleared out a bit I think for the major corporates to feel that they should be investing more. So hopefully that, over the next quarter or so, that picture will clear out a bit.

Marco Rodriguez – Stonegate Securities, Inc.

Okay, great. Thanks a lot guys.

Per-Olof Lööf

Thank you.

Operator

Your next question is from James Gentile, Newland.

James Gentile – Newland Capital Management LLC

Hey, guys. How are you? Good morning.

Per-Olof Lööf

Hi, good morning, James.

James Gentile – Newland Capital Management LLC

Just, you guys are kind of dancing around the gross margin guidance for the September period, and we’re actually kind of pleased that sales were flat given the current book-to-bill situation sequentially. I was just wondering, you kind of showed a little bit less of a gross margin ramp on mix, March over June. Are we to assume that September period should be flat sequentially at 15.2% and then add the beginnings of this restructuring plan?

Per-Olof Lööf

Bill didn’t give you a percentage, but he gave you a dollar number. So, I guess…

James Gentile – Newland Capital Management LLC

So, gross profit should be flat plus $2.5 million, call it?

William M. Lowe

There is some…

Per-Olof Lööf

Tantalum.

William M. Lowe

There is some, plus a little bit of the Tantalum. We said there is a little bit of a Tantalum uptick from the roll forward of about $1.5 million from the vertical integration into their numbers next quarter as well as the savings from this restructuring.

James Gentile – Newland Capital Management LLC

That’s great. So, because…

Per-Olof Lööf

You’re right. We missed it by – we missed, what we said by about a basis point. We said we would go up minimum of 200 basis points, we went up one.

James Gentile – Newland Capital Management LLC

Yeah, I know.

Per-Olof Lööf

That’s why we weren’t satisfied – as you are not, we are not satisfied with that result and…

William M. Lowe

We did better on the top line than we had anticipated.

Per-Olof Lööf

Right.

James Gentile – Newland Capital Management LLC

No kidding.

William M. Lowe

But as the percentage of that, we didn’t hit the number, we went up 1.1, and we should been up two. So…

James Gentile – Newland Capital Management LLC

All right, but we’re trumping seasonality again. So, let’s just pretend that we’re starting, because your stock is under tangible book value right now. So, let’s just press the reset button, figure close to $224 million in revenue, flat gross margins plus $3.8 million, call it $4 million of gross profit improvement. You guided to SG&A is $23.5 million to $24 million, is that correct, Bill?

William M. Lowe

That is correct.

James Gentile – Newland Capital Management LLC

And then your R&D should hold around the $7 million range?

William M. Lowe

Yes, it’s about – it’s seven and seven points.

James Gentile – Newland Capital Management LLC

Seven, seven.

William M. Lowe

Yeah, yeah. It will be about the same rate. We’re pretty…

James Gentile – Newland Capital Management LLC

Plus or minus couple of hundred thousand, right?

William M. Lowe

Yes.

James Gentile – Newland Capital Management LLC

Call it seven to eight.

William M. Lowe

That is correct.

James Gentile – Newland Capital Management LLC

And then, as we go through the interest – the interest expense should be kind of flattish at 10.5.

William M. Lowe

It should be consistent from quarter-to-quarter.

James Gentile – Newland Capital Management LLC

Right. Okay. And then as we kind of proceed to the second half of fiscal 2012, assuming that sales just stay flat, right, which has kind of been our assumption for the entire period, at what point -in quarter three, help us with the Tantalum gross margin help?

William M. Lowe

Seven plus from today.

James Gentile – Newland Capital Management LLC

So plus – so it will be – so sequentially, I’m going to get $1.5 million from vertical integration in the second fiscal quarter and then $5.5 million in the third quarter, correct, for a total of seven?

William M. Lowe

An additional $5.5 million, yeah.

James Gentile – Newland Capital Management LLC

Right. So, it will be an additional $5.5 million from there. But we’ll be just pretend remodeling it sequentially, and then the cost saves that were announced this morning should add what to gross profit?

William M. Lowe

Six.

James Gentile – Newland Capital Management LLC

Plus six in quarter three.

William M. Lowe

Yeah, there is – Tony has done a really nice, he’s really done all the math for you on what we discussed before. So, you should take that and put it on top as well.

Per-Olof Lööf

Yeah, he’s taken some of our past press releases and kind of summarized it. So, I think he’s got some information out there that he’s published it…

William M. Lowe

That we are – we agree with.

Per-Olof Lööf

It’s just because it’s off of our press release.

James Gentile – Newland Capital Management LLC

No, I understand it. The six million, this is not including the previous F&E restructuring?

Per-Olof Lööf

It’s approximately six, five and half, six.

James Gentile – Newland Capital Management LLC

I mean, we’re rounding, so five and a half on the Tantalum integration plus six million from today’s restructuring cost reductions.

Per-Olof Lööf

Yeah.

James Gentile – Newland Capital Management LLC

And then, how much in quarter three are we expecting in gross profit contribution from the previous F&E restructuring plan?

William M. Lowe

Another couple million.

James Gentile – Newland Capital Management LLC

Okay, so plus two. All right, so what you’re saying is, assuming we’re in this 15.2% gross margin range today and we pick up, call it, $4 million or so in sequential gross margin – gross profit in this, in second fiscal quarter, we should then on top of that assume another $13.5 million in gross profit improvement on flat sales in fiscal quarter three?

Per-Olof Lööf

Everything else staying the same.

James Gentile – Newland Capital Management LLC

Great. Okay. Thank you so much guys.

Per-Olof Lööf

All right.

James Gentile – Newland Capital Management LLC

Did I miss anything? Your share count should stay around 45 million, it seems?

Per-Olof Lööf

Basic share, share count – both basic and diluted should stay the same, more or less.

James Gentile – Newland Capital Management LLC

Okay. All right, all right, thanks.

Per-Olof Lööf

Thank you, James.

Operator

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

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Yeah, thanks. Just a quick follow-up. Could you give us the breakdown of sales by channel distribution, EMS and OEM?

William M. Lowe

Sure, the distri including distribution and ODM guys 46%, EMS 15%, OEM 39%.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Distribution 46%, EMS…

William M. Lowe

15%, OEM 39%.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

OEM 39%, okay. So, OEM was down and then distribution was up fairly significantly then. That was sort of…

William M. Lowe

It was up because it was down, unnaturally down, last quarter.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Okay. And as you look to next quarter by channel, I mean I know you’re guiding for the flattish with Asia up and Europe down and I guess North America sort of flattish. Would you expect sort of the channels to behave sort of similarly, and…?

Per-Olof Lööf

Yeah, we expect to be – we expected this move in distribution this quarter, and I think it’ll stay about the same.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Okay. And then to the – you just went through the whole, with your different components of the cost of goods, and how that plays out over the next three quarters. You did though talk about some pricing pressure in the F&E business. Obviously, you had some negative impact on gross margin. What’s your take on in the pricing environment going over the next couple of quarters or so?

Per-Olof Lööf

I think there are some pricing pressures in the system and across the board actually. But it’s not as aggressive as one could expect. So, we’re – the pricing pressure is sort of normal, if there is such a word or so. It’s not huge, but there is some pricing pressure in all of the segments actually.

Matt Sheerin – Stifel, Nicolaus & Co., Inc.

Okay. Okay, thanks a lot and best of luck.

Per-Olof Lööf

Okay, thank you.

William M. Lowe

Thank you, Matt.

Operator

Your next question is from Wamsi Mohan, Bank of America.

Wamsi Mohan – Bank of America/Merrill Lynch

Yes, thanks for taking the follow-up. My question is actually just a clarification around the savings from today’s announced restructuring. Is that, I found it from your comments like those significant component of G&A involved over there, so I was just wondering if this is more of a G&A savings that we will see or some of this, how is it split in between COGS and G&A?

Per-Olof Lööf

It’s on an annual basis, it’s not primarily SG&A. There is SG&A components, probably about 25% to 28% overall might be an SG&A line. As far as you have seen, a small component of it in this quarter, I mentioned what the forecast was, but about – of the 16%, it’s about 25%.

Wamsi Mohan – Bank of America/Merrill Lynch

25% on the SG&A line and the remaining in COGS.

William M. Lowe

This fiscal year, it’s about 25% of the total.

Wamsi Mohan – Bank of America/Merrill Lynch

I see, okay, thanks. And then what’s your expectation of ore pricing over the course of the next couple of quarters, and how much of your need that you’re currently sourcing from Congo?

Per-Olof Lööf

Well, we don’t really provide those details. But I think there has been some pricing pressure on ore and are going up. But that’s part of the reason why we’re taking these actions that we are taking so we have more control over that. There is some risk that ore prices will go up. But it’s not going to be dramatic, and certainly not for us.

Wamsi Mohan – Bank of America/Merrill Lynch

And Per, like how much of your needs are you sourcing from Congo, is that something you could share?

Per-Olof Lööf

No, we’re not going to share that.

Wamsi Mohan – Bank of America/Merrill Lynch

Okay, okay. Thank you.

Per-Olof Lööf

Thank you.

Operator

There are no further questions at this time.

Per-Olof Lööf

All right. Well, thank you very much for attending the call this morning and wish you all a great day and a great summer.

William M. Lowe

All right. Thank you everyone.

Operator

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

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