Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Kemet Corporation (NYSE:KEM)

Q3 2013 Earnings Call

November 1, 2012 9:00 am ET

Executives

Per Loof – President, Chief Executive Officer

William Lowe – Chief Financial Officer

Dean Dimke – Senior Director, Marketing Communications and Investor Relations

Analysts

Ruplu Bhattacharya – Bank of America

Hamed Khorsand – BWS Financial

Matt Sheerin – Stifel Nicolaus

Amitabh Passi – UBS

Marco Rodriguez – Stonegate Securities

Tony Kure – Keybanc

Operator

Good morning. My name is Suzette and I will be your conference operator today. At this time, I would like to welcome everyone to the Kemet Reports Second Quarter Earnings for Fiscal Year 2013 Results 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. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

Thank you. I will now turn the call over to Mr. Dean Dimke. Please go ahead, sir.

Dean Dimke

Thank you, Suzette. 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 second quarter for fiscal year 2013. On the call with me today is Per Loof, 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 home page. Once there, please click on the second quarter conference call link. That will bring up a few slides that we will call to your attention as we are covering those topics.

Before we begin, we would like to advise you that all statements addressing expectations or projections about the future are forward-looking statements. Some of these statements includes 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.

Before I turn the call over to Per, I would like to mention that the company will be presenting at the UBS Global Technology Conference on November 14 in New York City. A press release with the details will be forthcoming in the next day or so.

Now I’ll turn the call over to Per.

Per Loof

Thank you, Dean, and good morning. Our second quarter of fiscal year 2013 saw our net sales at $216 million, which was more or less on our forecast of flat to slightly down over first quarter. However, our adjusted EBITDA for the quarter was 16.3 million, which was an increase of 2 million over the prior quarter generated both from adjusted operating margins that increased to 16.3% from 15.2 over the prior quarter, and a reduction in SG&A expenses.

As you’ve heard from other technology companies, economic conditions are not improving and in fact have softened over the last quarter as uncertainty throughout the market persists. Over the course of time, we have discussed with you the drivers of our revenue from a channel perspective, and I thought it might be helpful to look at it graphically. If you turn to Slide 3, which Dean indicated is on our website for this call, there’s a graph depicting our orders received by channel over the last couple of years on a quarterly basis. The key takeaway from this information is that the volatility we have seen and continue to see is primarily in our distribution channel. The biggest decline we saw in this quarter and continue to see as we head into December is weakness in distribution.

Now referring to revenue in Q2, the OEM channel was very stable, down just slightly, and EMS is actually up 7 million quarter-over-quarter. The disti in the Taiwanese business, read laptops, is what caused the quarter-on-quarter drop in components. Total drop was 2%. By region, of course, Europe is a drag on revenues and this will continue for another quarter or so without significant signs of a pickup; however, it seems to have bottomed out. But the picture is not consistent – automotive is very stable, industrial is where the issue resides. The uncertainty that persists affects the investment plan clearly.

We are of course affected by the macro dynamics. It is important to understand, however, that our market share remains very stable in all business groups. The overall macro economic environment is driving our top line and the volatility, and as you can see from the slide, it is primarily a function of our distribution business. We cannot change the macro economic outlook and we cannot change the way our distribution channel manages its order book or inventories. POS is very stable to slightly up, actually, in October; but the overall uncertainty that exists drives our dist departments to lower their inventories, and that affects the entire industry. I do, however, believe that we will see some recovery in the March quarter.

Having said all that, what are we doing about it? Since we do not believe that we can rewrite the industry playbook, we need to realign our cost structure to operate profitably at revenue levels we are seeing today, in fact even at quarterly revenue levels that might be $25 million lower. We announced on our last earnings call that we are moving aggressively to realign our cost structure. That is happening and I am pleased with the progress being made in regards to implementing these realignment initiatives. One aspect of the announced plan has included a worldwide reduction in force. Together with the savings from the vertical integration of our tantalum supply chain as well as the restructuring of our F&E business, we expect to see an improving break-even point which not only will have us return to profitability at these lower revenue levels, more importantly it will position us for substantial gains once the economy regains traction. As Bill reviews the quarter with you, he will provide some more color on our cost reduction actions and savings expected.

Reducing cost is important, but growth remains a critical part of our road map as well. Our joint venture and proposed integration of NEC TOKIN in Kemet is certainly front and center. We have received regulatory clearance from the European Commission under the European Union Merger Regulation for our proposed acquisition of a 34% interest in NEC TOKIN. As previously announced on March 12, 2012, we 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 the required regulatory approval in China.

On October 29, we were informed by the Chinese Ministry of Commerce that its regulatory review of Kemet Electronic Corporation’s proposed acquisition of a 34% economic interest in NEC TOKIN Corporation would be extended by a period of no more than 60 days, expiring December 31, 2012. Such an extended review period is not uncommon and MOFCOM can grant regulatory clearance at any time during this period. The Ministry of Commerce has not informed us of any substantive concerns regarding the proposed transaction. While a definite closing date cannot yet be determined, we now expect that the transaction will close either near the end of our third fiscal quarter ending December 31, or during our fourth fiscal quarter ending March 31, 2013.

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

William Lowe

Thanks, Per, and good morning. I will begin my review on Slide 4 if you are following along on the slide deck that’s on the website. Net sales were 215.9 million, which were down about 3% over the prior quarter of June, which were 223.6 million, and this was more in line with our forecast, as Per mentioned, which is basically flat to slightly down. Our non-GAAP gross margin as a percentage of sales increased to 16.3% compared to 15.2% and represents three consecutive quarters that we’ve increased our gross margins. Our GAAP loss for the quarter was $0.55 per basic and diluted share, and our non-GAAP loss, which is reconciled on Slide 5, was $0.14 per basic and diluted share. Adjusted EBITDA for the quarter was 16.3 million, up from 14.1 million in the prior quarter ended June 30.

Turning now to Slide 6, our adjusted non-GAAP SG&A expenses were 24.2 million and were in line with the high end of our forecasted SG&A for the quarter at 24 million. As a result of our cost reduction actions beginning to have an impact, our expectation for the third fiscal quarter ending in December is that SG&A expense should be in the range of 22.5 million to 23.5 million, and we expect to see a continued reduction in SG&A in our fourth quarter up to an additional half million dollars in an attempt to set our run rate at approximately 22 million per quarter as we enter our next fiscal year.

On Slide 10, skipping forward a bit, capital expenditures during the quarter were 17.2 million, and that’s in line with the forecast we gave you last quarter of 13 to 20 million. We expect our capital expenditures for the December fiscal quarter to be in the range of 11 to 13 million and we further expect that excluding the funds received under our recently announced OEM contract, the company will spend approximately 48 million of our funds in this fiscal year for capital. Looking forward to next fiscal year, with substantially all of our restructuring efforts completed, we would expect our CAPEX to be in the range of 30 to $40 million.

Referring briefly to the OEM contract, in October we did receive the 24 million earmark for that contract, and as required under that contract we also issued a $16 million letter of credit under our revolving line of credit. We expect that we will utilize these funds for their intended purpose over the next six to seven months and that the forecast ranges we have provided for our CAPEX is exclusive of these funds. Our bank revolver continues to remain undrawn at this time and the cash in the bank at September 30 was 160.5 million, not including of course the receipt of the 24 million which occurred after quarter end.

Now let me speak to our cost reduction initiatives and add some color, as Per said earlier. Back on July 25 of this year 2012, we committed to a global restructuring plan to respond to the continuing economic slowdown. In this quarter ended September 30, we incurred a 7.5 million charge to earnings related to termination benefits. We’ve expanded the global restructuring plan to include additional headcount reductions which are expected to result in additional termination charges of approximately 4 to 5 million during this second half of fiscal year 2013.

In addition, effective with an announcement today, we’re beginning the restructuring of our Evora, Portugal manufacturing facility. This activity is expected to be completed quickly and will be completed during our fourth quarter ended March 31, 2013. As part of our ongoing commitment to expand our polymer capacity, we’ll be moving certain tantalum manufacturing equipment to our facility in Mexico from Portugal. We anticipate that as a result, we will write off approximately 5 to 7 million in equipment and incur termination benefits there of between 4 to 4.5 million. We’ll also have the manufacturing facility appraised and determine if the carrying value exceeds the fair value, which would result in an impairment charge.

In addition to facilitating our polymer expansion in Mexico, this action will reduce our tantalum business unit’s operating cost as well as reduce our inventories and in turn improve cash flow as we complete this fiscal year. The objectives of these actions, as Per alluded to earlier, is to allow us to operate profitably at the lower revenue levels we’re experiencing in these tough economic times. We’re not satisfied waiting until the macro economic environment returns to be profitable.

So let me try and piece the parts of the puzzle together for you. Please bear with me, and if I lose you, the good news is of course you can always print off a copy of this transcript when we’re done, or you can call us for a follow-up later.

First on the cost of the actions, last quarter we said we would accrue approximately 8 to 9 million in total for these actions, of which 7 would be accrued in the September quarter. We did in fact, as I just said, accrue 7.5 million this quarter and we indicated on today’s call that we would accrue an additional 4 to 5 million over the next two quarters. Therefore, that’s an increase of approximately 3 million of severance cost from our prior forecast. This additional accrual relates to more actions being put in place to address the continued softness in the market in order to further lower our break-even mark. Those actions, of course, come with savings as well.

On the savings side, we previously said these actions would save approximately $16 million this fiscal year. We said that approximately 2 to 3 million would show up in this quarter ended September, and I think you see that in our numbers, with a better bottom line by 2 million on $7 million less revenue, we appear to be on track with that.

We said that the third and fourth quarter would reflect reductions of approximately $6 million each. These additional actions will not have savings, and the additional actions I’m referring to relate back to that additional $3 million of severance cost, will not be additive to the third quarter, of course, as we’re just now taking those actions, but they will have a positive impact in the fourth fiscal quarter, adding additional savings of approximately $1 million.

Speaking briefly about our vertical integration efforts on which we have given savings guidance, lower volumes are having an effect on the rate of savings from a timing point of view on this effort. We are probably one quarter delayed from our expected savings at this time. We estimate in December that our savings would be approximately 7 million, and in March we’ll be at our expected quarterly run rate of $10 million of savings compared to our first quarter. While we see our current volumes as closer to a $5 million benefit in the December quarter and $7 million in the March quarter, and as volumes hopefully return as we move into the next fiscal year, we do expect to be at the full run rate of $10 million in our first quarter of next fiscal year, as projected.

Now last but not least, Evora – the savings from the Evora transition is really twofold. First on the balance sheet, we expect that when completed by March 31, we’ll be able to reduce inventory by approximately $5 million which will of course reduce our working capital component and add to our cash balance. Second on the income statement, we expect an overhead reduction in the tantalum business unit of approximately $1.5 million per quarter, beginning in April 2013.

To wrap up then and before I turn the call back over to Per, I’ll provide a view of our next quarter, and that is that revenue is expected to decline in the range of between 10 to $20 million or approximately 4 to 9% from this September quarter. It does feel like this is nearing the bottom, and while our ability to see much into the first calendar quarter is foggy at best, our current expectation is that it should show a slight improvement predicated significantly on what distribution does. At this rate of revenue decline, though, our bottom line and margins will be negatively impacted even though our cost savings will be in play, and this is what has driven us to actually do more from the cost savings side. Adjusted consolidated gross margins could also be impacted approximately 100 basis points.

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

Per Loof

Thank you, Bill. Let’s now take a look at our business results by our three business groups – ceramics, tantalum, and film electrolytics, as well as our three sales regions – Americas, Europe, and Asia.

I’ll start with the film electrolytics – revenue in Q2 was 53.6 million, down 14.8% versus Q1. The revenue decline was mainly driven by continued softness in the DC film segment and in Europe. The global demand for these components remains soft through Q2. Adjusted gross margin in Q2 was 2.5% as low component volumes negatively impacted fixed cost 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 order rate in Q2 was down approximately 10% versus the previous quarter with a book-to-bill of 0.95 for Q2. Current backlog is about 67 million as we move forward into Q3.

In our ceramics business, Q2 revenue was up by 3.1% over the previous quarter to 53.1 million. Adjusted gross margin results remain strong at 30.3%, resulting in a slight improvement compared to the previous quarter. This increase is largely driven by regional and product mix effects. The Q2 book-to-bill ratio was 0.93 as the distribution and the EMS channels aligned to end market demand.

On the tantalum side of the business, we ended Q2 with 109.3 million, flat versus last quarter’s number. Adjusted gross margin as a percentage of net sales was 16.3%. Demand in the EMS and OEM channels remained stable and inventory levels in the distribution channel continued their correction. Order rates from all channels reflected a more conservative outlook in the short term as we closed the quarter with a book-to-bill ratio of 0.90.

In the EMEA region, revenues for Q2 in fiscal ’13 were $70.7 million, a decline of 11% on the previous quarter. The European market, as I said, was impacted by the overall economic climate in addition to the summer vacation period, which was more pronounced than in recent years, both July and August being slow months. The book-to-bill for the quarter, however, finished close to 1 all of September, and September was a positive month.

In the Asia Pacific region, component sales for the quarter were $81 million, up 5% over the previous quarter. We see some improvement in demand from telecom infrastructure and power management; however, industrial, automotive and green energy segments are still soft due to government policy and the worldwide economic slowdown. In Taiwan, the ODM and OEM notebook companies dropped their forecasts quarter over quarter due to softening in customer demand. Asia Q2 book-to-bill was 0.84 and distributor polymer inventory is increasing, so we expect Asia Pacific Q3 sales revenue to be lower than Q2 by approximately 8%.

Revenue in the Americas region increased by 2.8% to 62.2 million, driven by improving demand in the automotive, defense, and aerospace segments. Visibility to end demand remains unclear as customers continue to be highly cautious as they deal with the global economic uncertainties. We ended Q2 with a positive book-to-bill of 1.12 and currently our book-to-bill remains positive. The inventory levels in our distribution level remain flat as POS held up relatively well.

Let’s look at our performance by market segment. On a percent of revenue basis, telecom segment increased to 21%, computer at 15, automotive at 20%. All remained stable on a percentage basis. Consumer and industrial were 9% and 23% respectively, slightly down on a percentage basis compared to last quarter. Both medical and defense increased as a percent of revenue to 5 and 7% respectively.

In closing, we have a long-term growth and cost down strategy that positions us for long-term financial success. In addition, we have taken quick actions now to ensure that we will be profitable as well as growing our cash balance even in tough economic times. Admittedly, it will take us two more quarters to get the costs to a level that accomplished this fully. As we have said, the revenue picture in the short term continues to provide challenges for us; however, we are on a solid track to accomplish our task to significantly bring down our net income break-even point.

This concludes our prepared comments, and we’ll be happy to respond to any of your questions.

Dean Dimke

Operator, we’re ready to go to questions.

Question and Answer Session

Operator

[Operator instructions]

Your first question comes from Wamsi Mohan from Bank of America.

Ruplu Bhattacharya – Bank of America

Yes, good morning Bill, good morning Per. This is actually Ruplu filling in for Wamsi this morning. Just wanted to talk a little bit about margins. It looks like overall, the gross margin was up 100 basis points, so that was pretty good. Just on the tantalum segment, though, am I correct that the margins were sequentially down, and just wondering what you’re seeing in terms of raw material pricing trends versus the savings you’re getting from vertical integration, and how do you see that margin trending in the December quarter?

Per Loof

Well, I think you’re right – the margins were slightly down on tantalum quarter over quarter, and in terms of the material costing, I think we’re seeing that being stable. And of course, as we’ve indicated, we’ve seen some improvement in the cost due to our vertical integration strategy, and of course due to the accounting, the benefits we incur in one quarter will actually only show up in the following quarter, so the savings we did in Q2 on a cash basis will actually show up in Q3.

William Lowe

And I think—again, we have forecasted revenues to decline, and I think at this pace at which the decline is, it will be difficult to see the pickup in margin next quarter as well. We have forecasted a consolidated margin that will probably drop back about 100 basis points, about where we were in the first quarter with a return to better levels in the fourth quarter as all these savings really kick in. With a quick revenue drop like that, it would be hard to make up that difference, even with these cost things starting to flow through the income statement.

Ruplu Bhattacharya – Bank of America

Got it. And just on inventory and distribution, it looks like orders from distribution were down again this quarter. Do you think you’ve reached the bottom in terms of inventory and distribution, or do you expect that correction to be extended into maybe the March quarter?

Per Loof

It’s a little hard to ascertain at this point, I think. When we talk to our disti partners, they see a foggy next quarter as well. So I think to some degree, yes, I think the inventory levels are reaching the bottom, and actually we’ve got some positive POS results coming in for October so that shows a good sign. But I think also they are driven to ensure that they have—you know, their inventories are at the competitive levels, and that of course affects us.

I think we will see the bottom this quarter and then we’ll see the distribution channel starting to kick in in the March quarter again.

Ruplu Bhattacharya – Bank of America

Okay, and the last one from me – what was the machining revenue part of the F&E segment this quarter, and how do you see that progressing next quarter?

William Lowe

Yeah, part of the drop in F&E was the machining, and that whole side of—the non-component side of the drop was almost $4 million—was $4 million, actually.

Ruplu Bhattacharya – Bank of America

Great, thank you.

Operator

Thank you. Your next question comes from Hamed Khorsand with BWS Financial.

Hamed Khorsand – BWS Financial

Good morning guys. Just wanted to talk with you guys about—you guys are saying there’s a bottom in the industry. You guys have been saying that for a couple quarters now. What makes you confident that we’re now hitting bottom?

Per Loof

Well, we will have to see what the macro economic situation looks like, and we are—if you look at our numbers, our drop this quarter was all in Europe. U.S. was slightly up, component sales in Asia was slightly up as well, so the entire drop in our performance was in Europe. So we do believe that this thing will bottom out as we go into this quarter, and we’re looking at very stable demand from OEM and EMS, and we’re looking at the end demand that we’re seeing in the distribution channel, and as we’re not seeing further decline in the POS, that means that once they reached a reasonable level in their inventories, they will start to pick up the order activities again. So that’s why we think this is the bottom.

Hamed Khorsand – BWS Financial

Okay. And then as far as consumer electronics goes, do you think there was much of a delay in activity just because of this Windows 8 release, and are you seeing any sort of recovery from production now that it’s been released?

Per Loof

As I said, the OEM side of the business is pretty stable, and this of course is where this activity happens. You might be right – maybe the Windows 8 delayed things, but I do think that the overall economic climate is what’s depressing. Businesses in Europe aren’t investing. Families are not investing either, and that of course affects consumer products as well as laptops and other devices. So I think Europe is really the—if I may call them the culprit in this situation we’ve seen for us, and I think many others are seeing the same thing.

Hamed Khorsand – BWS Financial

Okay. My last question is do you think that your competitors are picking up market share? I mean, your competitor had a pretty robust commentary about the outlook compared to what you guys are saying.

Per Loof

Our data clearly indicates that we are not losing market share – actually, on the contrary.

William Lowe

I think there’s actually—it seems like there’s mixed signals out there, so what’s going to be coming in the next 90 days in our group, I should say, between ourselves and a couple of our competitors have different views, some similar to ours and some not similar to ours. So it’s just an interesting dynamic.

Per Loof

And I hope our friends across the street are correct.

Hamed Khorsand – BWS Financial

Same here. Thank you, guys.

Operator

Thank you. Your next question comes from Matt Sheerin with Stifel Nicolaus.

Matt Sheerin – Stifel Nicolaus

Yes, hi. Good morning guys. So just a few follow-ups – starting with that $24 million OEM contract prepayment that you got, number one, when is the capacity for that deal coming online, and when do you expect to recognize revenue from that contract?

Per Loof

What we are doing is we are increasing capacity in Mexico, and what we did with our Evora facility is all connected to this as well, of course. Over the next six months, we will be implementing the capacity to deal with this, so you’re going to see some impact of that towards the end of the first quarter of next year, so in six to nine months.

William Lowe

The June quarter—the first fiscal quarter, yes.

Matt Sheerin – Stifel Nicolaus

Okay. And you went through some of the end markets. Remind us of your exposure to mobility, both tablets and smartphones, because that seems to be one bright spot.

Per Loof

Yeah, there is some increased opportunity for us in the mobility market, but today it’s not that huge, actually. In the telecom segment, we are more into the infrastructure – base stations and the like – than we are in actual handsets.

William Lowe

We’re not in—not too much in handsets, Matt, and have not been for a while.

Matt Sheerin – Stifel Nicolaus

Got you. And on the tantalum business, you talked about the negative book-to-bill. You also mentioned, Per, that in Asia you saw some inventory build of tantalum. Is that just a function of OEM customers seeing weakness toward the end of the quarter and now they’re working that off, and how does that impact the pricing environment and your own raw materials environment in terms of levers of either pulling that back or increasing when you need to do that?

Per Loof

Yeah, you know, there’s a couple of questions in that question of yours, a couple things here. One, when it comes to the inventory build-up in Asia, that’s primarily in the distribution segment. EMS and the OEMs are very lean – I mean, it basically comes in and gets put on boards right away, so there is really no inventory in those channels, so it is really distribution. When it comes to our own inventory levels and the material side of it, clearly as we started this journey on vertical integration, we had to fill up that supply chain so the inventory had to get filled up before we could actually work it off. But as we now start to implement this more fully, that inventory will be worked off so you’re going to see decreasing buys from us into that supply chain because it’s not fully operational. We believe we’ll be fully operational in that activity.

Matt Sheerin – Stifel Nicolaus

Okay. And then ASP pressure, I think Vishay talked about some tantalum pressure out there. Are you seeing that?

Per Loof

No, we’re not seeing that. You know, their tantalum business is a little different from ours, though.

Matt Sheerin – Stifel Nicolaus

Got you. Okay. And then in terms of the—so it sounds like this break-even—I mean, given the new cost-cutting efforts, is there sort of a number—I mean, you’re going to be down to whatever it is, under 200 million in revenue in December. Is 200 sort of a good break-even number for you, or what’s the number that we should be looking at?

Per Loof

I even said on the call here that the objective is to drive it down 25 million, so that gets it lower than the 200 million.

Matt Sheerin – Stifel Nicolaus

Got you.

Per Loof

And then we said—it’s a little—we guided 10 to 20 million, so it’s between 206 to 196 is sort of where we’re seeing the revenue come in.

Matt Sheerin – Stifel Nicolaus

Okay, but in terms of—you mean in terms of your break-even?

Per Loof

No, no, in terms of our revenue. You said we’d be down--

Matt Sheerin – Stifel Nicolaus

Okay, but I’m just talking about—no, I understand that, but I’m trying to talk about the break-even number here.

William Lowe

The inference from Per’s comment that that’s where we’re driving to, so as we exit the fourth quarter, we want to be in a position to be able to be at that point, at that revenue level and be break-even at that level, and are making a slight profit as we exit the fiscal year if revenues stay at that level. That’s the goal, and then if they are higher than that, of course, all to the good, right? It’s all a big plus.

Matt Sheerin – Stifel Nicolaus

Understood. Okay, thanks very much.

Operator

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

Amitabh Passi – UBS

Hi, thank you. Bill, I just wanted to clarify a couple of parameters with respect to the model. Did you say SG&A on a non-GAAP basis at 23 million for the December quarter?

William Lowe

I said—yes, 22.5 to 23.5 is the range I gave you for December.

Amitabh Passi – UBS

And then did you say 22 million thereafter, going into—

William Lowe

We’re looking for a run rate as we exit the fourth quarter around 22 million.

Amitabh Passi – UBS

And can you give us or remind us just the variability in your SG&A line? If revenues were to start ramping back up, can you hold it at 22 million or would there be a variable component?

William Lowe

The variable component of the SG&A is the S-piece. There is some variability somewhat, not a huge percentage of it – you know, 20% of the S-piece might be variable. So yes, it can fluctuate some; it won’t fluctuate multi-millions.

Amitabh Passi – UBS

Okay.

William Lowe

But yes – if revenue goes up, you could see it go up slightly, yes. Overall incentive compensation as it relates to revenue targets would increase.

Amitabh Passi – UBS

And then just briefly on R&D, should we expect it to stay at the 7, 7.5 million range?

William Lowe

Yeah, or slightly less. I think we were a little bit less than that this quarter, so somewhere—I wouldn’t change your model for that forecast. That 7 and 7.5, we’ve been running pretty consistently lately.

Amitabh Passi – UBS

Okay. And then taxes?

William Lowe

Taxes, really no change. Again, we typically say cash taxes between 1.5 to 2 on a quarter. I wouldn’t change that as well.

Amitabh Passi – UBS

Okay, appreciate that. And then just—can you just update us on where you are with respect to your Skopje and Pontecchio facilities in Europe?

Per Loof

Yeah, the Skopje facility in Macedonia is completed. We had the grand opening a couple weeks ago, and we have one filter line and five film lines there as we speak, and there the filter line is producing and the film lines are being qualified at this point. Currently, we have 93 people employed in Macedonia and we’ll have 150 in March, and we’ll have 250 by next year.

William Lowe

And we are shipping some product—

Per Loof

We are shipping some product, yes. But the big—you know, it’s going to take us this quarter to qualify the film stuff, so that will start a ship out to customers by the beginning of next quarter. And of course, this is all tied to the Italian restructuring, and as that moves forward further film lines will be moved to Macedonia.

The Pontecchio facility in Italy is progressing on schedule and will be completed in July of next year, and then the three facilities in Italy, we will exit those and move some further stuff to Macedonia and the rest will go into Pontecchio. So by next—you know, less than 12 months from now, basically our restructuring efforts will have been completed.

Amitabh Passi – UBS

And then finally, any update on your ability to source tantalum from the DRC? Just wondering if you have any update on that.

Per Loof

Well, we are producing through our partners and getting ore from the Congo and making the K-salt in South Africa, and that’s converted into powder; and as I said previously, by December that whole chain should be fully operational. So it’s going almost to schedule. I’d say we are maybe a quarter behind in terms in realizing the benefits, but this was a relatively complicated task and a number of unknowns, so I think a quarter delay is probably at least a B-plus, I think.

Amitabh Passi – UBS

Okay, thank you.

Operator

Thank you. Your next question comes from Marco Rodriguez with Stonegate Securities.

Marco Rodriguez – Stonegate Securities

Good morning, Per and Bill. Just a couple quick follow-ups. Just wanted to circle back around to the inventory on your balance sheet, the sequential uptick. Was that all tantalum or was there anything else in there that caused that?

William Lowe

All tantalum.

Marco Rodriguez – Stonegate Securities

Okay, got it. And so from your commentary, Bill, I believe you said that there would be a $5 million reduction. Is that towards the Q4 or are you seeing that in Q3?

William Lowe

No, we’ll see that in Q4.

Marco Rodriguez – Stonegate Securities

Okay, got it. And I was wondering if you could provide any other additional color in regard to NEC TOKIN, the approval there in China. What’s holding up that there? What can you share with us?

Per Loof

Well, I shared with you we have had dialogue with the Ministry of Commerce in Beijing, of course, through our representatives there, and they indicated at the beginning of this week that they wanted to go into Phase 3 of the review process, which seems to be pretty common now in China. That is a 60-day process, so it will end by December 31 this calendar year. We have had no substantive questions or concerns that we have seen from the Ministry.

Marco Rodriguez – Stonegate Securities

Are they just taking more time reviewing it? Anything there you can provide?

William Lowe

I don’t think we can come to any particular conclusion, other than the fact that they’ve asked us to do that. As Per said, it’s becoming very common for it to go to Phase 3, so we’re not—I don’t think there’s anything more to say about it, really.

Marco Rodriguez – Stonegate Securities

Right, okay. Fair enough. And lastly, can you discuss the deferral of the acquisition payments in the quarter? I was expecting that to kind of happen in your cash flow from investing.

William Lowe

The amount that would have been paid this quarter, would have been paid in August, would have been $5 million for the Niotan, now Kemet Blue Powder acquisition. If you recall, the way that works was we made a payment at closing of approximately 35 million, and then every six months we make a payment. This particular payment in August was 5 million. Payments every six months thereafter will be 10 million, so we’ll see six months from August we’ll see another $10 million payment. That was what was in the cash flow.

Marco Rodriguez – Stonegate Securities

Okay, got it. Thanks a lot, guys.

Operator

Thank you. Again, if you would like to ask a question, please press star then the number one on your telephone keypad. And your next question comes from Tony Kure with Keybanc.

Tony Kure – Keybanc

Hi, good morning gentlemen. You’ve talked a lot about the distribution channel and where we’re at. I guess maybe if you could put in context comparing the distribution levels, inventory levels now versus maybe where they were last time we entered a destocking period a year and a half ago or so. Could you just talk about where you think the inventory levels are as compared to the prior time that we went into a destocking period?

Per Loof

Yeah, I think the inventory levels—I mean, the business is much better now than at that time, of course, so we’re not seeing the same huge drop that we saw back in ’09. I think the inventory levels, as I said, in the disti channel will—they are concerned about what’s happening in the overall macro picture and also the fact that lead times have come in gives them the opportunity to be a bit more, shall we say quick on the trigger here in terms of getting more supply into their inventories.

So I think that at this point, we are seeing POS being pretty stable and actually uptick slightly, so I would expect that they will work this through maybe this quarter, and then I think you’ll see the distribution channel start to order again towards the end of this quarter and into next quarter. It’s just how the math works as we see it.

Tony Kure – Keybanc

Okay. And then Bill, if you could help me out and maybe just walk through the savings impact again, and just maybe put it in terms of the expected savings now on the operating line from the September quarter to the December quarter, and then the December quarter—I’m sorry, the September quarter to the December quarter, and then December to March. Maybe you could just clarify that for us, please.

William Lowe

Sure. I mean, I’ll attempt to, as I said when I started. It’s kind of a puzzle, but basically if you cut through it, and I apologize for repeating what we said last quarter, but I thought it was important again to put the numbers back out there. Essentially, we aren’t changing what we said originally from the global restructuring plan of how the savings would fall above the 16 million, basically. We said we’d get 2 to 3 this quarter, and I think you do see that in the numbers this quarter. You see a better gross margins consolidated for the company; you see a bottom line that’s 2 million better on $7 million less revenue, so certainly the savings we said that would be in the September quarter are within our profit and loss statement.

What we said then, and it didn’t change, we expected savings to be around $6 million in the third quarter, the December quarter; and what I said this morning was basically that is unchanged, that the further additional actions we’re taking that are generating some additional termination benefits really are going to flow through the fourth quarter. So we added—that 6 million for the fourth quarter that we originally estimated becomes 7 million. I added 1 million to that number in the fourth quarter, which is a nine-month payback basically for that additional severance, so if you’ve paid in a million dollars a quarter, you’re getting it back in nine months, so it’s fairly quick from that standpoint.

So that’s what we’ve set additional on top of what we’d previously forecasted, so we weren’t changing substantially what we said in the past; in fact, we weren’t changing what we said in the past at all with the exception of what Per also commented on, is that we’re probably one quarter off on the tantalum savings – that instead of 7 million in the December quarter we said, now that’s probably 5, and in the fourth quarter rather than 10, it’s probably 7. So there is less benefit coming from the tantalum integration in this fiscal year, but then being at the run rate which we expect to be as we enter into the first fiscal year at the 10 million range. And that—if you recall, this is all compared to our first quarter ended June, and we’re talking about the savings dollars. We’re comparing it to the June quarter, if you recall.

Tony Kure – Keybanc

I do. I do. Okay. That’s helpful. And as we think about the timing of all this and all these moving parts here, obviously the quarter push-out gets us more—you know, you’re just getting a little bit less here in fiscal ’13. It doesn’t change the fiscal ’14 outlook, but you guys have talked about 10% EBIT margins, 25% gross margin business. Does this timing—does that still—first of all, is that a fiscal ’14 goal, and has that changed at all? Can you just talk about that sort of longer term margin structure goal?

Per Loof

It doesn’t change, and it’s still the objective. As we enter into all of these restructuring activities, which will be completed pretty much in the first half of next fiscal totally, that should be achievable objectives. And also, as we have now decided to pull the trigger on Evora, Evora will not close. We will have other activities in Evora in the film electrolytic segment, but the tantalum will be consolidated in Mexico and China and that’s going to, as Bill said, generate a quarterly savings on the overhead side of 1.5 million, plus of course the additional savings in the inventory side, and allows us to work our polymer business better in Mexico as well. So that’s an additional savings that we hadn’t put out.

William Lowe

That’s true, that’s true.

Tony Kure – Keybanc

Okay, so I guess closing the loop there on that thought, you don’t expect to get that for the full year in fiscal ’14 to that goal, you just maybe expect to get there, starting achieving that type of margin run rate maybe, what, by the third quarter of next year?

William Lowe

Yeah, I mean, it will ramp up. Certainly there’s not a cliff that occurs on April 1, and some of the actions—you know, getting into Pontecchio, for instance, Per indicated the timing of that is not happening really until the summer to—you know, August, September type of time. The building has to be done first and then we have to move things in, so the full benefit of that is occurring really in the second and third quarter of next fiscal year.

So yeah, it will build. I don’t know if I want to project which quarter we get there at this point; but yes, it’s a progression, it’s not a cliff.

Per Loof

But you can also—you know, we guided to where our break-even point would be, so you can do the math from that as well.

Tony Kure – Keybanc

Okay, thank you.

Operator

Thank you. There are no further questions in queue. I’ll turn the call back to you, Mr. Dimke.

Per Loof

All right, well—this is Per. Thank you very much for being on the cal this morning, and we wish you all a great day. And for those of you who live up in the northeast in New Jersey and New York, our thoughts and prayers are with you and we hope that you can get back to business quickly. Thank you all.

William Lowe

Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Kemet's CEO Discusses F3Q2013 Results - Earnings Call Transcript
This Transcript
All Transcripts