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Edited Transcript of AVX earnings conference call or presentation 24-Oct-18 2:00pm GMT

Q2 2019 AVX Corp Earnings Call

FOUNTAIN INN Nov 9, 2018 (Thomson StreetEvents) -- Edited Transcript of AVX Corp earnings conference call or presentation Wednesday, October 24, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Sarvis

AVX Corporation - Chairman, CEO & President

* Michael E. Hufnagel

AVX Corporation - Senior VP, CFO & Treasurer

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Conference Call Participants

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* Gregory Payne

Greenship Financial - Analyst

* Jim Suva

Citigroup Inc, Research Division - Director

* Matthew John Sheerin

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the AVX Corporation second quarter earnings release conference call. (Operator Instructions)

It is now my pleasure to turn the floor over to John Sarvis, CEO of AVX Corporation. Please go ahead, sir.

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John Sarvis, AVX Corporation - Chairman, CEO & President [2]

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Thank you. Good morning. I'd like to welcome you to the AVX conference call regarding the results for our second fiscal quarter that ended in September. I'm Johnny Sarvis, and with me today is Mike Hufnagel, AVX Chief Financial Officer. We hope you've had a chance to review our earnings release and related disclosures issued earlier this morning.

Our second quarter bookings reflect healthy market conditions across all regions and product groups. Although, as expected, we have seen some slowdown in bookings toward the end of the quarter as our customers realign their product needs to meet market conditions. Our core product delivery lead times remain extended on ceramic products, and we're seeing lead time improvements on the larger tantalum styles. With the additional MLC capacity coming online, combined with market adjustments, lead times will improve over the next several quarters.

Sales in the December quarter will reflect the typical holiday seasonality, which primarily influences the U.S. and Europe, as customers close production facilities.

Our backlog remains strong and continues to support growth. We continue to see modest growth across most markets. Net sales in the quarter rose to $456.3 million, impacted by a further reduction of the Kyocera resale product activity, whereby, sales were reduced by $15.8 million compared to the previous quarter as we complete the wind down of our Kyocera resale activity.

In this quarter, the distribution channel increased to 42% of our overall shipments, reflecting strong distribution activity as inventories remained below normal levels with industry extended lead times.

Regionally, and looking at our revenue split, each geographic region, once again, faced similar market conditions. We saw some changes in revenues as a percentage of the total due to product demand and availability. The Americas is at 28%; Asia, 32%; and a decrease in Europe to 40% of our sales, reflecting lower European automotive shipments as well as increased activity in the distribution channel in the Americas.

As mentioned, we've seen some slowdown in bookings toward the end of the quarter as our customers realign their product needs to meet market conditions, with overall orders for the industry remaining healthy, reflecting the market demand of tantalum in both MnO2 and polymer, standard MLC, high-capacitance ceramic components, antennas, sensors and connectors. Our overall book-to-bill for the quarter was 1.05%.

The worldwide macroeconomic environment index continues to show growth. The global PMI further declined in September but still remains above the critical 50 point mark, which indicates further industry growth.

China's economy weakened in the last quarter due to tariff regulations, which especially affected the Chinese consumer production exports.

In September, the U.S. consumer index rose to 138 base points due to a strong economy and robust job growth. Germany, the economic engine of Europe, held steady in September, propped up by consumer spending and a strong increase in orders from non-European countries.

Excluding the Kyocera resale business and prior year's comparisons, AVX total bookings were down 9% to Q1 and up 75% year-on-year. In the Americas, orders were up 1% over Q1 and up 50% year-on-year. The European orders were 11% down to Q1, impacted by the WLTP car certification issue, but up 107% year-on-year. Asia orders were down 16% to Q1 but up 69% year-on-year.

The worldwide distribution shipments were up 8.5% to the previous quarter, with POS up 4% over quarter 1. The book-to-bill from our franchise distribution partners was positive in Europe and the Americas, whereas China softened in Q2. Our overall POS outlook for the coming quarter is to be flat.

Addressing various market segments, August sales of light vehicles were up 4.1% year-on-year at 99.7 million vehicles, the global growth driven by exceptionally strong increases in Western Europe. This led by promotions of older vehicles and the anticipation of upcoming changes to the WLTP regulations. We expect Europe to slow in the coming months as an offset, with overall light vehicle sales projected to finish the year at 2% growth.

The economic -- the electronic content continues to grow aggressively on the back of the increased sales of battery electric vehicles. BEV car capacitor content is 4x compared to the internal combustion engines. The BEV market is projected to grow double digits over the next several years.

As an example, the new battery car models released from the PSA Group, like the DS 3 Crossback, and the Mercedes EQC at the Paris Motor Show this month. Volkswagen further announced their aggressive target to sell 150,000 electric cars by 2020.

AVX partners with major automotive manufacturing leaders and Tier 1s with our sensor and controls, interconnect solutions, capacitor and circuit protection components. The automotive sector remains our strongest industry sector with 38% of the shipments in our second quarter. We will continue to focus on this market segment and trust in a long term growth trend.

The overall mobile handset market in units slowed due to the saturation and lack of product differentiation in new models. The top 7 smartphone manufacturing shipments were flat in quarter 3, relying -- underlying the previous 2018 forecast of 1.5 billion units, with a year-on-year growth of 2%.

The smartphone market foresees a slower growth in units in comparison to previous years, but the positive is, the newer model phones contain twice the number of capacitors. AVX shipments to this segment remained stable and represented 13% of the total second quarter revenue.

Networking, telecom and consumer markets were slightly up in Q2 and represent 20% of our total revenue. However, the road to 5G has many stepping-stones, such as a narrow band, IOT and gigabyte LTE that continues to evolve and attract large development spend.

Our RF capacitors and filters, along with the antennas, fit well in these applications. We continue to work closely with our customers in developing new products as we support the march to complete 5G deployment.

The computer market continues to be an issue in calendar quarter 3, with the notebook PC shipments flat year-on-year and tablet PCs projected to be down roughly 5% year-on-year. Our revenue was flat this quarter and represents 11% of the total business.

We are expecting a return to growth for notebook PCs in 2019 due to upgrades as the technical support ends for Windows 7 and Windows Server 2008. The PC market will continue to see a threat from smartphones, but the new PC tablet hybrids offer new applications that will require television replacement with video and program viewing.

The aerospace industry continues to be driven by the industry push for more fuel-efficient aircraft and the satellite industry. The global small satellite market is projected to be greater than $7.5 billion in 2022 with a CAGR of 20.8%.

The defense industry is in the early phase of a decade-long up cycle. The U.S. DOD budget for 2018 is $660 billion, which is up $61 billion over 2017. Our aerospace and defense business continues to be strong with a 1.2 book-to-bill this past quarter.

As mentioned in the past, we foresee an overall long-term growth for the electronic components based on new IOT applications, the increase of electric content in cars, smart home devices that are connected to the Internet and new consumer wireless devices. We now live in a connected world, which continues to require an increased demand of electronic components and solutions.

The gross profit percentage came in at 27.7%, reflective of improved operating performance in our operations and improved mix of higher-margin product. In addition, we're experiencing better prices in the market. SG&A expense in the quarter came in at $40.8 million or 8.9% of sales, consistent with the prior quarter.

The impact of lower tax rates resulting from last year's tax law revisions in the U.S. continued to impact our tax provision this quarter, as reflected in our overall lower tax rate compared to last year.

For the quarter, we paid $19.4 million in dividend payments and spent $27 million for facility improvements and equipment purchases. Depreciation expense totaled $18.1 million. The intangible amortization expense was $3.6 million. We currently anticipate sales being relatively flat for the December quarter, reflective of the normal seasonal activity.

We estimate that the gross profits in the December quarter will be in the 24% to 26% range. Our selling, general and administrative expenses should come in between 9% and 10% of net sales. The blended tax rate should be approximately 21%.

We are optimistic about our prospects over the coming quarters as we continue the integration of the sensor control and antenna products into our sales channels and the inclusion of the Kumatec business acquired earlier this year. Our design win pipeline continues to expand, driven by the introduction of innovative products designed to address stringent product application requirements.

I would now like to open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Jim Suva of Citi.

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Jim Suva, Citigroup Inc, Research Division - Director [2]

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Can you help us, first, understand a little bit about what did ASPs, or average selling prices, do for this quarter? I believe that they're probably going to be a little bit higher than normal long-term trends just because some of your contracts get renewed and the tightness. And if you can help us out what ASPs as well as what units did, either year-over-year or quarter-over-quarter?

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John Sarvis, AVX Corporation - Chairman, CEO & President [3]

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Okay. ASPs quarter-on-quarter, Jim, stayed relatively flat. But maybe some slight increase in certain products, but pretty much comparable to quarter 1. So we did not see any impact there as far as any kind of price increases or price reductions.

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Jim Suva, Citigroup Inc, Research Division - Director [4]

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And that's better than normal, correct? Because normally, you would expect to see price reductions?

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John Sarvis, AVX Corporation - Chairman, CEO & President [5]

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Yes. Normally, we see anywhere from 5% to 7% price reductions year-on-year. Now we're still in negotiations on some contracts for this quarter, which will impact pricing beginning in the fourth fiscal quarters and the first calendar quarter.

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Jim Suva, Citigroup Inc, Research Division - Director [6]

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And as we look ahead to pricing, what should we kind of anticipate given the tightness? I would assume we're not going back to the 5% to 7% normal price declines for quite some time?

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John Sarvis, AVX Corporation - Chairman, CEO & President [7]

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That is what we're seeing right now.

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Jim Suva, Citigroup Inc, Research Division - Director [8]

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Okay, great. And then, also, I believe your revenues that you just posted were a little bit softer than what you had originally guided 3 months ago. So can you help us bridge or understand the difference there?

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John Sarvis, AVX Corporation - Chairman, CEO & President [9]

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Yes, one thing I think we can't lose sight of is that previous quarter had approximately $16 million of Kyocera resale products, whereas quarter 2 only had roughly $1 million of sales. So if we look at the sales quarter-on-quarter, we actually did go up. But -- so -- but they're not -- we're just not shipping. We're wrapping up on the Kyocera resale product, which is impacting the revenue of Q1 and Q2.

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Jim Suva, Citigroup Inc, Research Division - Director [10]

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Okay, so it was all attributed to the Kyocera products. Okay.

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Operator [11]

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

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [12]

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Just a question, John, regarding your commentary about European auto, which I know was slow for a lot of suppliers due to the regulatory issues that you talked about. Do you think though that there's going to be -- I mean, is that sort of a holdover into this quarter? Why you're seeing continued softness? And do you expect that to rebound after these issues are resolved or dealt with?

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John Sarvis, AVX Corporation - Chairman, CEO & President [13]

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Yes, Matt. Yes, we anticipate this emissions issue regulation impacting this quarter, current quarter. But as we close in on the -- this quarter, looking into the -- early into our fiscal fourth quarter, we expect things to readjust back in that area. There's still automobiles that are still having to go through all the testing, as we understand it, which is also impacting new product production. And the plan is for that to resolve itself for the most part in the current quarter.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [14]

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So you think that should be -- your auto business overall -- I know you're guiding the whole business flat, but do you expect auto to be up then sequentially as it typically is?

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John Sarvis, AVX Corporation - Chairman, CEO & President [15]

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Not in Q3.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [16]

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No. Okay. And then in the -- in terms of your outlook for China auto, there's been a lot of concern about EV weakness and subsidies, et cetera, a slowing economy there. What's your take on the China auto market, and particularly as it relates to content growth?

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John Sarvis, AVX Corporation - Chairman, CEO & President [17]

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With relative to the HEV business, we're still seeing strong demand in HEV and BEV applications across China as well as in North America and Europe. As far as the other automotive within -- excluding the HEV, we're seeing relatively stable even in our China market.

Most of our China market where we're seeing an impact is in the consumer area, some areas on the computer and smartphones where we see this quarter slow down, but not necessarily on the automotive sector. But there are some issues relative to tariffs that I think some of the China market is facing.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [18]

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And do you have -- I know you have some exposure, manufacturing exposure, in China, and I know that some of your products are subject to that. So how are you -- is that --- and it doesn't sound like -- you haven't called it out as an impact, but could you just talk about that? And how that might affect things going forward?

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John Sarvis, AVX Corporation - Chairman, CEO & President [19]

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Yes, we have a couple of products that are manufactured in China. And -- but relatively percentage-wise, in -- shipping back into the U.S. is very small. We're not seeing much of an impact relative to tariffs on the products that we manufacture.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [20]

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Okay. And then on the -- your commentary about just a little bit of a moderation, and you didn't say correction. Some of your semiconductor counterparts, like TI last night and others, have talked about a broader slowdown, and others are talking about inventory correction in the channels.

Of course, you've had shortages so there's no inventory out there, and in the past cycles, AVX and other capacitive guys have lagged the semiconductor cycle a little bit.

So do you see that -- any signs aside from some of the normal seasonality where you're concerned that there could be a correction? Because, obviously, there's double ordering of your product now, right? So as more capacity comes online, is there concern there? And are you watching for that? Are you trying to manage that?

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John Sarvis, AVX Corporation - Chairman, CEO & President [21]

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We are watching it and also trying to manage it. We have seen some adjustments in backlogs based on what we anticipate is to be some double ordering in the supply chain.

But if we look at our distribution channel, particularly because roughly 40% of our business is distribution and most of the inventories that we have are primarily in the distribution channel, looking at those inventories right now, they're still low as compared to historically what they have been.

So based on that, we're not anticipating any major shift relative to business levels going forward. Lead times, as I mentioned early, in some categories are coming down. But even with the reduction of lead times, we're still in the 20-plus week lead time on some of our product areas. So demand is still exceeding capacity.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [22]

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And then lastly, do you have -- could you just update us on your capacity adds? And when you expect and how much you expect to add over the next few quarters?

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John Sarvis, AVX Corporation - Chairman, CEO & President [23]

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This quarter -- or next quarter, we'll see a slight increase in capacity in our MLCC product category, with additional capacity, not, say, a small -- less than double-digit capacity from Q3 to Q4. But looking at next year, we're looking in that 10% to 15% increase in capacity, and that will be staged during the year -- throughout the year in terms of quarter increases.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [24]

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And that's fiscal '20 we're talking about?

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John Sarvis, AVX Corporation - Chairman, CEO & President [25]

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Yes.

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Operator [26]

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Your next question is a follow-up from Jim Suva of Citi.

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Jim Suva, Citigroup Inc, Research Division - Director [27]

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When do you think we get into supply/demand equilibrium? It sounds like it's at least a couple of quarters away, if not longer? Or do you think it happens in the next quarter or 2?

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John Sarvis, AVX Corporation - Chairman, CEO & President [28]

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I think it's going to be product-driven, Jim. But if you look at our tantalum MnO2 polymer, we're seeing some improvement on lead times. And supplies have been opening up a little bit, so we're seeing some relief in that area.

Looking at MLC, a little different situation. We're not seeing that impact yet or that significant an impact. In fact, we're still seeing very strong demand. So that's why I said it's a little bit product-dependent, so.

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Jim Suva, Citigroup Inc, Research Division - Director [29]

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Okay. And then my follow-up. How should we think about OpEx going forward? It sounds like your comments around tariffs, doesn't mean you need to make a lot of CapEx adjustments? Or maybe I'm off on that?

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John Sarvis, AVX Corporation - Chairman, CEO & President [30]

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Yes, we -- in that increase in capacity that we have on our road map, and we've got about a 2-year, 3-year plan, we will continue to be spending and investing in additional capacity in several product areas as well as new facilities.

And I'm sure you guys are aware that we've done some major facility improvements and modifications in our Greenville, South Carolina facility. We're in the stage now of finishing up a new plant in our Malaysia area. And we're in the planning stage of another mega plant that we're yet in determining where we're going to put that plant. So...

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Jim Suva, Citigroup Inc, Research Division - Director [31]

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So can you help us quantify what we should model for like CapEx for maybe this year and next?

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Michael E. Hufnagel, AVX Corporation - Senior VP, CFO & Treasurer [32]

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$80 million.

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John Sarvis, AVX Corporation - Chairman, CEO & President [33]

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Probably somewhere in the $80 million number this year.

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Jim Suva, Citigroup Inc, Research Division - Director [34]

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Okay. And then can you help break down by product and markets percent of sales as well as, say, tantalum versus ceramic?

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John Sarvis, AVX Corporation - Chairman, CEO & President [35]

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Sure. In the ceramic, this quarter represented 26% of our sales; tantalum, 23%; our advanced components, 23%; and our Interconnect, Sensing and Control, 27%.

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Jim Suva, Citigroup Inc, Research Division - Director [36]

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Okay. And then what about like autos and consumer, industrial and things like that?

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John Sarvis, AVX Corporation - Chairman, CEO & President [37]

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Okay. Going through our market segments, automotive, as I mentioned earlier, is 38%; cellular, 13%; computer, 11%; consumer, 8%; industrial, 8%; medical, 6%; military, 4%; networking, 3%; and telecom, 9%. So relatively stable to last quarter with the exception of some shifts in automotive and cellular and telecom.

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Jim Suva, Citigroup Inc, Research Division - Director [38]

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Okay, great. And then my final question -- taxes, I think they were about 21%, or you're guiding at 21%. Is that a pretty good go-forward rate? Is there anything you need to know, given your recent acquisitions or go to markets or tax laws, that we should be aware for tax rate going forward?

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Michael E. Hufnagel, AVX Corporation - Senior VP, CFO & Treasurer [39]

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Jim, this is Mike Hufnagel. I expect that a 21% rate for Q3 is quite accurate. There's nothing unusual in there. We've had a few minor items in the first couple of quarters that brought it down a little bit lower, but I expect it to go forward at that -- around that 21% rate.

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Operator [40]

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At this time, there are no further questions. I'm sorry, we now have a question from Greg Payne of Greenchip Financial.

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Gregory Payne, Greenship Financial - Analyst [41]

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Just a further question on the market dynamics and how you see that developing over the next couple of years. What are you seeing in terms -- I know there's capacity additions coming from your peers like Kemet, TDK, Murata. How much are you tracking those?

And as you see backlog has kind of come off as some of the double ordering goes away, what's your sense of the general industry approach here? It's kind of a follow-up to the equilibrium question.

And then also maybe a little bit more granularity on ceramic versus tantalum. You say you see more tightness in ceramic, and how that's guiding where you're allocating your capacity? And also in the context of where you see your peers allocating the new capacity?

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John Sarvis, AVX Corporation - Chairman, CEO & President [42]

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Yes. I guess, let me start at the beginning. Are we looking at our competitors' capacity expansion based on what we read? Yes, we are. We do track that very closely. But if you look at capacity and spending and market, we differentiate ourselves from a lot of our competitors, primarily in the product matrix that we're focused on.

We are not a heavy player in the smaller -- higher-capacitant smaller-sized MLC components. It's predominantly dominated by most of our Japanese manufacturers. Our focus is more on specialty high rail, larger step size, higher voltage. So that's the areas that we're continuing to expand our capacity on. So it's a little bit different from our competitors, or industry-known competitors and their focus in terms of expansion.

In terms of equalization in the market -- equilibrium, I'm sorry, everybody has got their opinion. Opinions range anywhere from 1 year to 2 years. I think you hear some of our competitors saying that the market dynamics in the MLC, they don't see it changing much over the next couple of years. So I think we're in -- somewhere in between that 1-year and 2-year deal in terms of our outlook.

But our outlook will not change based on our plan of expansion that we're pretty much working on. And due to lead times of the capital requirements that are currently running on in the industry, we have to make plans now. So again, we've pretty much set our road map based on where our product focuses are and what we think those markets will be.

So relative to tantalum, the tantalum market continues to shift a little. Historically, tantalum has been an MnO2 product. Now we see that shift into more -- movement into the polymer area, whereas the low end of the tantalum area is being replaced by ICV MLCs. So -- and that's where we're moving our focus is in that -- more into the polymer area.

If you look at the overall market in tantalum, it's a slight growth. But you have to be -- really dig into the details to understand that because there are shifts, as I said earlier, between the materials of the tantalum market, MnO2 versus the polymer. Hopefully, I answered your question.

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Gregory Payne, Greenship Financial - Analyst [43]

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Yes, that's a good answer. I guess, so you're -- fair to say then, are you allocate -- are you adding the capacity more or less along the ranges of what you just gave in the sales breakdown, ceramic tantalum versus advanced components? Or are you -- and then in tantalum, focusing on polymer based on what you just said? Or is there any more specific focus to the capacity additions that you're doing?

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John Sarvis, AVX Corporation - Chairman, CEO & President [44]

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No, you're pretty much right. Our focus in tantalum is in the polymer area. Our focus on the MLCs is on market -- on the largest [size] and high-voltage capacitors, MLC. And so that's where we're making our investment.

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Operator [45]

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(Operator Instructions) At this time, there are no further questions. I'll now return the call to management for any additional or closing remarks.

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John Sarvis, AVX Corporation - Chairman, CEO & President [46]

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Well, thank you for joining. This quarter, from a margin standpoint, a very good margin performance. The market still -- in our eyes, still appears to be healthy. We don't see any downward shifts relative to market conditions, although we will see some stabilizations.

The auto market, again, we expect the European area to stabilize the -- based on these omissions things that we're currently going through. So we anticipate a quarter -- next quarter be relatively close to this quarter relative to revenue due to the seasonality, not necessarily due to the business trends dropping.

And we do see fourth quarter as a rebound on the automotive and the emissions issues that are currently existing in Europe. But again, thank you. Thank you for your questions, and we look forward to having more conversation next quarter.

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Operator [47]

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Thank you for participating in the AVX Corporation second quarter earnings release conference call. You may now disconnect.