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Edited Transcript of AVX earnings conference call or presentation 24-Jan-19 3:00pm GMT

Q3 2019 AVX Corp Earnings Call

FOUNTAIN INN Jan 25, 2019 (Thomson StreetEvents) -- Edited Transcript of AVX Corp earnings conference call or presentation Thursday, January 24, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Sarvis

AVX Corporation - Chairman, CEO & President

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Conference Call Participants

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* Matthew John Sheerin

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

* Polina Sparks

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Presentation

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Operator [1]

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Good morning, and welcome to AVX Corporation's Third Quarter Earnings Release Conference Call. (Operator Instructions).

I will now turn the call over to AVX Corporation's Chief Executive Officer, John Sarvis, to begin. Please go ahead, sir.

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

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Thank you, Maria. Good morning. I'd like to welcome you to the AVX conference call regarding the results for our third fiscal quarter that ended in December. 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.

As predicted on our call last quarter, the third quarter bookings slowed as our customers realigned their product needs to meet market conditions. Our core product lead times remain extended on certain high-capacitance ceramics along with continued lead time improvements on our standard ceramics and tantalum products. With the additional MLC capacity containment to come online, combined with current market conditions, lead times will continue to improve over the next several quarters, particularly in the commodity-type products. Sales in the March quarter should improve in the 1% to 2% range. Our backlog remains strong and continues to support growth.

Markets were somewhat muted this quarter, reflecting typical holiday seasonality, which primarily influenced the U.S. and European markets as customers closed production facilities and distributors adjusted their year-end inventories. Current market conditions are also being impacted by a slowdown in China's economy with tariffs being [primarily impacted along the] slowdown in automotive sales and production in all regions.

As a result of our sales for the quarter, we're negatively impacted but we anticipate recovery going forward as the new emissions requirement issues in Europe were resolved this past quarter.

Net sales in the quarter declined approximately 3% to $442.4 million. In this quarter, the distribution channel increased to 45% of the overall shipments, reflecting strong distribution activity.

Inventories slightly increased as more commodity product became available combined with the impact of reduced customer work schedules due to the holidays. POS was seasonally down in all 3 regions to the previous quarter, but up year-on-year whereas the America has the strongest performance with an 18% increase year-on-year.

In general, we see mix signals from our channel partners with a soft demand in Asia as well as flat result in Europe due to the holiday period. Europe should return to growth in Q4 and continuous positive book-to-bill ratios in the U.S.A. suggest another strong quarter.

Regionally, and looking at our revenue split, each geographic region, once again, faced similar market conditions. We saw some minor changes in revenue as a percentage of the total due to product demand and availability. Asia 33% and Europe at 40% of our sales. As mentioned, we've seen some slowdown in bookings during the quarter as our customers realign their product needs to meet current market conditions. The overall orders slowing somewhat as predicted reflected the market demand of tantalum and both MnO2 and polymer, high-capacitance ceramic components, antennas, sensors and connectors. Our overall book-to-bill for the quarter was 0.97%.

The worldwide macroeconomic environment index continues to show growth. The global PMI is still above 50, meaning manufacturing is still in the expansion territory. But the index is at its lowest since November of 2016. Factory activity in China contracted with their PMI now being below the crucial 50 point mark. External demand remained subdued due to the trade frictions between China and the U.S., while domestic demand weakened more noticeably.

The worldwide car sales were under pressure in the second half of the calendar year. It is estimated that 2.6 million electric vehicles will be sold globally in 2019. This will represent around a 40% growth rate, down from the 70% growth rate in 2018. China is expected to lead with some 1.5 million units, which is around 57% of the global electronic vehicle market.

Also, we foresee continuous strong demand for passive components, antennas, sensors and interconnect solutions due to the rising electronic content and vehicles, such as ADAS, infotainment, vision systems, instrumentation, clusters, braking systems, body controls, electric power steering, powertrain and the gradual increase and incorporation of wireless technology and positioning technologies such as Wi-Fi, Bluetooth, 3G and 4 LTE, vehicle-to-vehicle and vehicle-to-anything. The automotive sector remains our strongest industry sector with 37% of our shipments this quarter. We continue to focus on this market segment and [trust on] an accelerated long-term growth trend for years to come.

The overall mobile handset market continued to be under pressure in calendar Quarter 4. China's December mobile phone shipments were down 16.3% year-on-year and 2018 was down 15.7%. Our cellular business was 1% down to the previous quarter, representing 11% of the total revenue. Networking, telecom and consumer further increased in Q3 and represent 21% of our total revenue. The steady conversion to 5G continues to fuel present and future growth. 5G technology relies, in large part, on high-capacitance transmission, which uses high-frequency, short-length radio waves with short ranges. As each 5G base station covers a smaller area than the 4G networks, carriers are looking to build denser networks using stations that are more compact. This means higher component demand for our components that include capacitors and antennas. The world electronic production for the computer segment was up 3.5% in 2018. The sector of personal computers, desk space notebooks and premium ultramobiles were flat with 288 million units in 2018. Growth rates for the SSD market, which was 14% up year-on-year and expected to grow 15% during the forecast period of 2018 to 2023. The 3D printer market was significantly up in 2018 with more than a 40% growth year-on-year. Our computer business represents 12% of our total revenue and grew double digits year-on-year.

The military and aerospace market remains strong. One sector, commercial airlines, where the backlog of commercial aircraft is at its historic high with over 14,000 planes. This trend is expected to continue through any temporary market cooling. Our business in this market continues to be strong with year-on-year growth of over 30%. Our backlog remained strong with extended lead times for the advanced electronic components.

In recapping, the holiday periods, inflation, tariffs and trade disputes influenced this quarter's performance and will continue to have an impact on market conditions going forward. We trust in the overall long-term growth for electronic components with continued growth in new applications. These new applications will lead to future volume markets for the electronic components like IoT, industrial Internet of things, 5G, smart home grids, robots, drones, 3D printing, health care and a further electrification of cars compared with new automotive applications in safety and health.

The gross profit percentage came in at 28.5%, reflective of our focus on improved operating performance in our operations and improved product mix of higher-margin, value-added products. In addition, we are experiencing favorable pricing in the market.

During the quarter, SG&A expenses, including legal and environmental, came in at $42.2 million or 9.5% of sales.

The operating profit was favorably impacted by an accrual adjustment of $13.9 million as a result of a recent reduced jury award in the Greatbatch patent infringement lawsuit. This was partially offset by an $8.3 million charge related to the estimated environmental remediation cost related to a legacy environmental issue at an inactive site to which AVX never operated. The impact of the 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 effective tax rate compared to last year.

For the quarter, we paid $19.4 million in dividend payments and spent $29.1 million for facility improvements and equipment purchases. Depreciation expense totaled $19.6 million. Intangible amortization expense was $3.6 million.

As noted, we currently anticipate sales in the March quarter improving in the 1% to 2% range. We estimate that the gross profit margins in the March quarter will be in the 27% to 28% range. Total selling, general and administrative expenses should come in between 9% and 10% of net sales. The blended tax rate should be approximately 20%.

We are optimistic about our prospects over the coming quarters as we continue the integration of the sensor control and antenna products and 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 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) Our first 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 [2]

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Just a few questions from me. If we could just start with the breakdown of revenue by market. You gave some of that information, which was helpful, but could you round that out for us, automotive, I think you said was 37%?

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

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Yes, Matt, sure. The automotive, again, was 37%, the cellular 11%, computer 12%, consumer at 8%, the industrial at 9%, medical at 5%, military at 5%, networking at 4% and telecom at 9%.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [4]

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Okay. And then by product segment, could you break that down as well?

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

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Okay. In the ceramics section, we were 27%, and our tantalum was 22%, the advanced was 25% and the Internet sensing and control group was 26%.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [6]

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Okay, great. And you mentioned that the -- it sounds like the booking weakness has come from Asia, but I think you mentioned that book-to-bill was still positive in Europe. Could you give us a book-to-bill by region, if you have it?

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

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Matt, I don't really have that breakout. But again, Asia was where we suffered our lowest book-to-bill ratio relative to tariffs and this slowdown in the mobile handset market or primarily drivers out of the Asia area. In Europe, it's primarily the automotive industry, and this quarter was impacted by the emissions regulation on this WLTP, which all the impetus that we're getting now from our automotive contacts and our customers [that hears it]. They clear that up for the most part in the December time frame. So looking ahead into this quarter should be a much improved area in terms of the [automotive] in Europe. Looking across North America, U.S. was the strongest of all regions relative to the book-to-bill. So that gives us that. I don't have the exact percentages on hand...

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [8]

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Okay, but it sounds like it was positive in North America and will be positive in Europe, but not so in Asia, it sounds like.

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

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Right. I think Asia, we will continue to suffer until we get some resolution on this tariff issue.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [10]

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Yes. And are you seeing signs -- I mean, given that -- I mean, I know that you and competitors were -- obviously saw double ordering last year with lead times extended. And you said there's part of your portfolio, where you're seeing lead times come in. So are you seeing any order cancellations or signs of distributors or customers working inventory down?

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John Sarvis, AVX Corporation - Chairman, CEO & President [11]

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We've seen some minor cancellations, again primarily in Asia. If you look into North America and Europe, a very little impact relative to any cancellations from the distribution channel.

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

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Okay. And then, looking at the capacity, you did talk about certain product areas that are in tight supply on allocation. Could you give us just a sense of what percentage is supertight now versus 6 months ago? And as you look out, I know you do have some capacity expansion plans. Could you give us an idea of what you think the lead times might do over the next couple of quarters as more capacity comes online?

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

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Okay. If you look across the core products, the ceramic and tantalum products, we've seen some lead time reductions in the MnO2 product in the tantalum area. The lead times on the polymer are still extended at this point and probably will be for the next couple of quarters. If we're looking at the ceramic group, I think I mentioned early in the advanced military and aerospace area, we still have extended lead times on that because the business has been very strong. Looking at the commodity ceramics, the -- we have seen lead time reductions come in on that because of the more availability of products with the expansion in capacity, not only by us but for most of our competitors. Where we're still seeing extended lead times is in the high CV ceramic area, a lot of that being driven by automotive and telecom. And the supplier still has not caught up with the demand requirements there. So I think that we will continue to see it probably through most of the calendar year.

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

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Okay. And just lastly, on the pricing, you talked about ASP. Is that one reason why you see margins are holding up here? And do you expect, I mean, your pricing increases just hitting now where you might see margin improvement as that gets traction over the next couple of quarters?

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

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No, I think for the most part, price increase is pretty much stabilized. We don't -- we haven't seen any in this past quarter. Where we possibly will see some impact is in the commodity areas I mentioned earlier, where the availability of product is getting better. A little less price around lead times, a little less orders being placed with longer lead times in mind. So -- and with that, with the additional capacity, we're more than likely to see some slight impact in ASP. And I think, we noted that where we say we may see some shift in margin in the next quarter, not substantial but slight change.

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

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Meaning ASP erosion, which is typical in your business, but we haven't seen that, is that what you're saying?

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

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Yes, sir.

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

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Yes. Okay. Okay. Actually just one more, if I can. Just regarding these acquisitions, I mean, you've got -- you've made several acquisitions under your belt here for a year or plus. Could you just give us an update on how they are -- that's helped reposition the company, diversify your product portfolio and any costs or opportunities to increase margins as you integrate them?

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

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Actually, the integration is running along very well, Matt. We -- I just came back from Europe on visiting TS&C operation. And they are running pretty much to our expectations that we have for them this coming year. And they're focused on margin improvement. We're looking at leveraging some of our material costs along with -- across the current AVX consolidation of material. So we feel like we can get some additional leverage there as well. So with the antenna area, we're -- our focus there was to expand our product into different market segments. It was primarily -- the time of the acquisition was primarily focused in the smartphone area. Now we've done a lot of work with our sales and technical groups to expand their customer base and to improve our position in different industries there. So that's for the most part, looking at a year, I think we've moved along pretty well.

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Operator [20]

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(Operator Instructions) Our next question comes from the line of Polina Sparks of Argus.

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Polina Sparks, [21]

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I just wanted to ask if you could provide some clarity on what kind of forecast you would have in terms of units for deliveries in this quarter and in the rest of the year for ceramic capacitors and tantalum, both MnO2 and polymers? And if you're seeing any play-off between those markets, especially the high-end as capacity expands on ceramics?

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John Sarvis, AVX Corporation - Chairman, CEO & President [22]

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Could you repeat that one more time, I'm sorry, I didn't get it all?

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Polina Sparks, [23]

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Okay. I just wanted to see if you could provide a forecast in terms of delivery for ceramic and tantalum, MnO2 and polymer capacitors? And if you see any shift between the high -- between and tantalum as capacity expands for ceramics?

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John Sarvis, AVX Corporation - Chairman, CEO & President [24]

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Looking at the projections and looking -- primarily if you're looking at the tantalum area between 1% to 2% increase in growth this year. And I said -- as I said earlier as far as the forecast on the products in terms of lead times, I think we're at a point right now on the MnO2 where lead times have been relatively constant for the last couple of months and will probably somewhat stay pretty much where they are. Relative to the polymer area, the growth rate is a little bit higher in the polymer area because of the conversion there. But lead times, we're not getting enough capacity in place to make much of an impact on the lead times. So we expect those to continue to stay extended through at least the first half of the year. If we're looking at the ceramic components, we're looking at roughly 5% to 8% growth in the ceramics area. Again, on the commodity side of that business, lead times will more than likely continue to improve. They have improved quite a bit in the last quarter. But if you're looking at the high CV, which is the highest growth in that particular product line and where the demand is still exceeding supply, we will bring home capacity all next year as would our competitors, but we're not seeing where we're going to see much relief in lead times throughout the calendar year.

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Polina Sparks, [25]

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Then, I guess, old unit numbers, can you give us any forecast on the deliveries you expect to customers?

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John Sarvis, AVX Corporation - Chairman, CEO & President [26]

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Yes, I'm not sure what you mean by forecast on deliveries side.

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Polina Sparks, [27]

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On units, on unit numbers, I guess.

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

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I don't have that available, so I can't give you that right now. I can give you roughly what is going on in the overall market and what our plans are, but I don't have the exact number on the units.

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Polina Sparks, [29]

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Okay. Could I ask, on the raw material side, are you seeing any instability there in terms of either supply or prices? And how you're handling any risks on that side?

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

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For the most part, we haven't seen any reductions in materials meaning we are stable to some slight increases in some of the areas, especially in the precious metal areas, where prices are fluctuating weekly. But primarily, not in a positive manner for us, most of that is on the opposite side, where we're seeing some material increases.

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Polina Sparks, [31]

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And how are you managing that risk in terms of supply?

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John Sarvis, AVX Corporation - Chairman, CEO & President [32]

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How are we managing?

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Polina Sparks, [33]

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Any risk to -- any instability in supply or volatility in prices?

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John Sarvis, AVX Corporation - Chairman, CEO & President [34]

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I'm not -- not volatility in supply. The issue is the price, not the availability of the product. We're not seeing any constraints in terms of supply of any of our raw materials but we are seeing price implications on those materials.

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Operator [35]

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(Operator Instructions) And I'm showing no further questions at this time. I would like to turn the floor back over to management for any additional or closing remarks.

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John Sarvis, AVX Corporation - Chairman, CEO & President [36]

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Thank you, Maria. Thank you, and thanks to all the attendees. We appreciate your interest, and we're looking forward to starting a new year and a close of our fiscal year. So we look forward to speaking to you in April. Thank you.

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Operator [37]

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Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.