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Edited Transcript of KEM earnings conference call or presentation 16-May-19 1:00pm GMT

Q4 2019 KEMET Corp Earnings Call

SIMPSONVILLE May 31, 2019 (Thomson StreetEvents) -- Edited Transcript of KEMET Corp earnings conference call or presentation Thursday, May 16, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory C. Thompson

KEMET Corporation - Executive VP & CFO

* Richard J. Vatinelle

KEMET Corporation - VP & Treasurer

* William M. Lowe

KEMET Corporation - CEO & Director

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Conference Call Participants

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* Craig Andrew Ellis

B. Riley FBR, Inc., Research Division - Senior MD & Director of Research

* Marco Andres Rodriguez

Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst

* Matthew John Sheerin

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

* Maynard Joseph Um

Macquarie 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 KEMET's Fourth Quarter Fiscal Year 2019 Earnings Conference Call. (Operator Instructions) Thank you.

It is now my pleasure to turn the conference call over to Richard Vatinelle. Sir, the floor is yours.

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Richard J. Vatinelle, KEMET Corporation - VP & Treasurer [2]

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Thank you, Raquel, and good morning, everyone. This is Richard Vatinelle, Vice President and Treasurer. Welcome to KEMET's conference call to discuss the financial results for the fourth quarter and year-end to fiscal year 2019, which just concluded March 31, 2019. Joining me today on the call is Bill Lowe, Chief Executive Officer; and Greg Thompson, Executive Vice President and Chief Financial Officer. As a reminder to you, a presentation is available on KEMET's website, which will help you follow along with the financial portion of the presentation.

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 the statements include words such as expects, anticipates, plans, intends, projects and indicates. Although they reflect our current expectations, these statements are not guarantees of future performance, and they involve a number of risks, uncertainties and assumptions. Please refer to our 10-Ks and 10-Qs and our registration filing statements for additional information on the risks and uncertainties.

On May 22, we'll be attending the B. Riley Annual Investor Conference in Beverly Hills, California. On June 4, we will be at the Baird Global Consumer, Technology & Services Conference in New York. And on June 11, we will be Stifel's Cross Sector Insight Conference in Boston. We hope to see you in one of these events.

Now I will turn the call over to Bill.

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William M. Lowe, KEMET Corporation - CEO & Director [3]

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Thanks, Richard, and good morning, everyone. We had an exceptional year with our sales up 15% that led us to achieve a 100% growth in our non-GAAP EPS and a 51% increase in our EBITDA year-over-year. Over the past several years, KEMET has made several significant structural changes to the business, including improving revenue and our cost structure, positioning the company for future growth and shareholder value creation.

Our financial success is driven by 4 strategic actions. We had discussed many of the changes before, but I think it's worth mentioning again just to explain the positive impact that they have had in our financial results and how we're positioned to perform going into this next fiscal year and beyond.

Tantalum vertical integration and a focus on polymer technology, combined with the operational synergies from the TOKIN acquisition, drove our operating costs down, increased yields and provided access to additional market segments. The ceramics focus on specialty, multilayered, large case sizes and working closely with our customers to designing our products with a focus on the growing automotive market segment provided a niche for products requiring high temperature, vibration, and voltage.

The timely and successful integration of the Magnetics, Sensors & Actuators Business Group from the TOKIN acquisition has further diversified our products, geographies, and these are all major factors driving our success. Our successful refinancing of our debt last fall created $21 million in cash savings per year to our interest expense, and we instituted a cash dividend to our shareholders for the first time in the company's history.

Our fiscal year 2019 financial results demonstrate the fundamental strength of our business across a broad range of electronics segments. Diversification is critical to the success of our business, and as we touch a multitude of markets with various opportunities for growth, enhancing our ability to create value for shareholders.

As a full-service provider in the capacitor space, we also produce approximately 95% of the dielectrics available to serve our customer needs. KEMET is not the same company it was 10 years ago or even 5 years ago. As we look ahead, we see tremendous opportunity to build on our positive momentum, drive long-term growth and enhance shareholder value.

Now I'll turn the call over to Greg to provide some commentary on the numbers.

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Gregory C. Thompson, KEMET Corporation - Executive VP & CFO [4]

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Thank you, Bill, and good morning, everyone. I'm sure you've had a chance to review our press release this morning. So I will highlight only a few key metrics from it. We're very pleased to report that our results exceeded our projections, both on the top line and bottom line as we achieved above the top end of our guidance, we previously provided.

Revenue for this quarter was up 11.9% to $355.8 million compared to Q4 last year. GAAP net income was $93.4 million and our non-GAAP adjusted net income was $62.1 million in the current quarter. This compares to GAAP net income of $2.3 million in the fourth quarter last year. Non-GAAP adjusted net income was $26.2 million in the fourth quarter last year. GAAP net income in fiscal year 2019 includes a tax benefit of $39.5 million, which I will discuss more later. GAAP gross margin was up significantly, 780 basis points from 27.7% to 35.5% due to top line growth and continuing operational efficiencies in the Solid Capacitor segment.

Non-GAAP gross margin came in at 34.8%, down 80 basis points from last quarter due to a less favorable product mix in our Film and Electrolytic segment and lower sales in our MSA segment. GAAP diluted EPS was $1.58 compared to $0.04 for the fourth quarter last year. Non-GAAP EPS was $1.05 compared to $0.44 fourth quarter last year.

Our adjusted EBITDA for the quarter was up 62.7% to $78.9 million from $48.5 million in the fourth quarter last year. The full year adjusted EBITDA margins has steadily increased over the last 2 fiscal years from 13.9% in March 31, 2017, to 20.9% for the period ending March 31, 2019. EBITDA for the full year was up 51% to $290 million compared to last year.

The significant improvement in our results have been driven by the structural changes Bill mentioned: top line growth in all segments, operational improvement, and significant margin expansion. Non-GAAP SG&A expenses of $47.6 million were above our estimated range for the quarter and were driven by higher consulting fees related to the initial year of Sarbanes-Oxley controls adoption in the acquired TOKIN businesses, along with some relocation of sales offices and personnel. We project these expenses to return to more normal levels going forward.

Taxes this quarter was a benefit of $48.7 million due to the release of the net operating loss valuation allowance in the U.S. and the partial release of a similar valuation allowance in Japan. This resulted in a significant onetime benefit to our GAAP results from the realization of the benefits from these net operating loss carryforwards. This tax benefit is due to the significant improvements in our profitability, along with our forecast for continued increase profitability going forward. The recognition of this tax benefit in fiscal year 2019, however, will result in a higher effective tax rate for both GAAP and non-GAAP results going forward, starting with fiscal year 2020. I will address this further in the outlook section of my remarks today.

Capital expenditures during the quarter were $68.4 million compared to $37.2 million in the prior quarter. This coming quarter, we project to spend in the range of $20 million to $30 million for capital expenditures as we continue our planned capacity expansion to support future customer demand and improve our IT infrastructure around the globe. We project our full year CapEx spend to be in the range of $120 million to $135 million, excluding approximately $45 million to $50 million of capacity expansion related to the customer capacity agreements, which are funded by customers. We previously disclosed these capacity agreements with 3 separate customers, whereby 1/3 of our expanded ceramics capacity was completed in fiscal year 2021, will be in effect, presold to these 3 customers.

With $207.9 million of cash on hand and a net debt of $86.6 million, our balance sheet is strong and gives us significant flexibility to pursue strategic growth opportunities. I also want to mention with our recent refinancing in November, we no longer require a public debt rating from the rating agencies.

Given there's no need and to save on annual rating agency fees, we have now converted both of our ratings from a public to a private rating. By maintaining a private rating, we should be able to quickly access the debt markets should a need arise.

Turning to our business groups. Solid Capacitors revenue increased $45.1 million in Q4 compared to the fourth quarter last year and was up 21.3% over $164.6 million for the full year fiscal year compared to last year. Looking at the 2 Solid Capacitor segment product lines, revenue for our tantalum product line increased 8.3% or $10.6 million for Q4 relative to fourth quarter last year and 13.8% or $68.1 million increase for the full fiscal year. The year-over-year improvement was driven by continued success in our tantalum polymer product development and growth initiatives primarily in the tablet, PC, telecom, cloud and automotive industries. Polymer products continue to drive high design and interest where applications involve higher frequencies, harsh environments, limited board space and enhanced audio quality requirements.

Revenue for the ceramics product line increased 45.3% to $34.5 million in Q4 versus fourth quarter last year. For the full fiscal year, revenue increased 34.9% or $96.5 million. These increases were across all channels and regions. These improvements were driven by new product introductions, driving product mix, pricing and volume from capacity expansion. Growth was broad-based across all ceramic-focused industries led by automotive, industrial and defense and aerospace.

Solid Capacitors' segment gross margins improved by 640 basis points from 35.6% to 42% and was driven by increased revenue, product mix optimization, favorable pricing for MLCC's and favorable manufacturing performance as a result of a continuing focus on recurring cost-out initiatives and yield improvements. Our Film and Electrolytic business revenue was $50.5 million, $4.5 million lower than the fourth quarter last year. Fiscal year 2019 revenue was $206.2 million, which increased approximately 2% compared to last year.

Revenues slowed in the distribution channel during the fourth quarter, mostly in the Asia-Pacific region for this segment. Gross margins improved to 220 basis points from 7.5% to 9.7% due mainly to cost reduction initiatives. Our focus for Film and Electrolytics continues to be implementing cost reduction and efficiency improvement activities at our manufacturing sites, including the recently announced closing of the Granna manufacturing facility for electrolytic capacitors in Sweden.

For the Magnetic, Sensors and Actuators segment, revenue for the quarter came in at $57.4 million, $2.8 million lower than fourth quarter last year. The decrease was mainly driven by a slowdown in demand for flex suppression sheets that are sold to the smartphone market and reduced demand for an antenna product related to gaming consoles.

For fiscal year 2019, MSA revenues came in at $240.7 million, 6% ahead of last year. Gross margin in fiscal year 2019 was 18.8% compared to 21.7% in the prior fiscal year. For the total year, we saw overall strength in actuator products going into the semiconductor equipment segment and some weakening in demand for antenna products associated with the consumer gaming equipment. In addition, demand for piezo products related to the consumer and commercial fishfinder business was solid. Demand for metal materials related to the medical segment remains very strong and stable.

Now I will turn the call back to Bill.

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William M. Lowe, KEMET Corporation - CEO & Director [5]

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Thanks, Greg. I'm going to start with some commentary on our industry sectors and our pipeline of product wins. In the automotive segment, we continue to lock in many designs, securing wins across all product lines. Designs for ADAS devices, like new radar systems, are rapidly increasing, driving larger adoption of our polymer automotive grade. It is particularly exciting to see the significant wins for our European automotive OEMs with our magnetics product line from the MSA business group.

Electrification of transportation remains the single most transformative trend in the industry. With electrification increasing, we expect demand for our products to continue to increase even if the unit volume declines somewhat. This is perhaps best exemplified by looking at our success with one particular EV-maker design, which is projected to reach $17 million in revenues this year in fiscal '20, which will be up over 100% versus fiscal '19.

Our ceramic automotive grade, Film and Electrolytic and first-to-market polymer automotive grade capacitors are all significant elements in such a design. This project was less than $1 million just 3 years ago and underlines how fast things can move in the automotive segment.

Thanks to the large number of EV power and charge platforms we're involved with, our Film and Electrolytic product pipeline is growing. All our key target projects are developing well, with several ones now entering the sampling stage.

In the industrial arena, we're observing a growing demand for components able to operate in harsh environmental conditions, such as our film DC Link and our film RFI, which is related to filtering and power transmission functions.

In addition, sustainability is now a clear worldwide priority, which is boosting the requirement for energy generated from green sources like wind and solar. This is well in line with our roadmaps, in particular, with our film capacitors where we continue to add design wins in both filtering and power transmission functions as I mentioned.

To give perspective in fiscal '19, we doubled the sales to our key customers manufacturing invertors for solar. The film serious harsh-environment-graded components, previously introduced to the market, are being quickly adopted by our industrial customers with sales projected to break $2 million in fiscal '20, growing at an average of 45% per year over the last 2 years. More importantly, our active pipeline for such products is around 10x the current sales values.

In telecom and 5G specifically, we're very pleased with our design wins in tantalum polymer that we'll see start to come into our revenue later this fall and into our fourth fiscal quarter of this -- next fiscal year.

5G is widely regarded as a once-in-a-decade event, which will drive significant increase in usage of electronic components. We're well positioned to take full advantage of this transition with our specialty ceramic as well as our polymer products used in the edge computing hardware units. Our yearly award related to 5G infrastructure is up more than 60% year-over-year, and this is still just the beginning.

This explosion of devices has been driving an equal explosion of data posing an ever-growing requirement for quick and reliable data storage and transmission. Polymer tantalum provides the highest energy density amongst different capacitor dielectrics, and this allows KEMET to hold a significant position in the SSD market segment and we continue to add new designs with new customers.

And last, we continue to experience very strong activity in the defense and aerospace segment, in particular, in North America. There's a growing number of designs in all the main systems like satellites, radar and missile control units. This favorably impacts our ceramic and tantalum military-grade product lineup.

Now let me spend a few minutes now discussing the MLCC situation, and then I'll comment and our channel partners and distribution. In ceramics, KEMET is still running full capacity. And our needs continue to add capacity to fulfill demand. Since we do not focus on the mobile device market segment and the small case size ceramics that they require, the slowdown in the cell phone market and the oversupply, created by those that manufacture them, has had a minimal effect on KEMET. Let me emphasize again that KEMET is focused on specialty or value-added ceramic products that demand the ability to withstand high-temperature, current, vibration and voltage.

Additionally, approximately 60% of our ceramic product volume is sold into the growing automotive market sector. A large case ceramic supply/demand gap that has been created by both market demand and competitor strategies continues to exist.

Certainly, we're seeing a slowdown in the distribution channel from an order standpoint, but the OEM channel remains strong and robust, so we're now able to provide quicker relief to our OEM customers as demand slows in distribution. We continue to expect another great year in fiscal 2020 from our ceramics product line.

Further, we have effectively presold, as Greg mentioned, 33% of our future capacity through our capacity agreements with 3 customers that we believe provide assurance of a softer landing than our competition if, I say, if, a slowdown were to occur in the future. And at the same time, it guarantees those customers the volume and components that they require.

Turning now to the distribution channel. POA generated a $151.8 million in revenue, which was flat versus Q3 '19 but up 18% compared to a year ago. Our channel partners' book-to-build for our products remained positive for the quarter at 1.02. Channel inventory of KEMET product did grow 14% in the quarter, and we continue to work with our distribution partners to ensure that they balance POA with POS to prevent unnecessary inventory build.

The distribution channel has been adjusting backlog across all regions driven by shortening lead times. As a result, POA in our fourth quarter was down slightly to Q3 down about 2%. Americas was down 7%; Asia down 2%; and EMEA was up 3%. This is impacting our tantalum business more than our other product lines.

As I said while discussing our MLCC product line, the adjustments that are being made in distribution for ceramics are actually helping us meet the demands for our OEM customers and minimizing our expedites as we continue to run at full speed there. On another positive note, POS was very healthy in Q4, growing 6% as compared to Q3. By region, America's POS was up 4%. Asia was down slightly at 1%, and EMEA was up 14%.

Before I turn the call back to Greg, I'll provide some color on the China-tariff situation in KEMET. The new tariffs imposed under List 3 by the Trump administration will have very little direct impact on KEMET. We continue to pay primarily on our polymer product, that has been true since the first tariffs were introduced.

In regards to the Tariff's announced by the Chinese government just this week, we project very little impact under those tariffs, possibly $300,000 or less. Most of our material that we import into China for our facilities do not come from the United States.

Now I'm going to turn the call back to Greg to discuss our guidance for the next quarter.

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Gregory C. Thompson, KEMET Corporation - Executive VP & CFO [6]

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Thanks, Bill. Turning now to our outlook. We expect our first quarter revenue to be in the range of $338 million to $348 million, up approximately 3.2%

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6.2% compared to last year's first quarter. We continue to see some inventory reductions in the distribution channel as Bill mentioned. But for us, we expect this weakness should be more than offset by expected growth in our other channels and the continued strength of our diversified product offering across multiple geographies.

The non-GAAP gross margin will continue to be strong between 33.5% and 35% as a result of the favorable pricing environment and ongoing focus on operational efficiencies. Selling, general and administrative expenses should be between $44 million and $46 million, and research and development expenses will be approximately in the range of $12 million to $13 million.

Our global effective tax rate will be around 25% to 28% for the first quarter. A more normalized rate following Q4's net operating loss, valuation allowance releases. This higher effective tax rate is due to our improved profitability and our future expected profitability, resulting in the realization for financial statement purposes of our income tax, net operating losses. In spite of this increase to our reported effective tax rate for fiscal year 2020, we expect cash taxes to be in the range of $15 million to $20 million for the year.

Now I'll turn the call back to Bill for some final remarks.

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William M. Lowe, KEMET Corporation - CEO & Director [7]

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Thanks, Greg. KEMET has always demonstrated a deep commitment to the environment, our employees and the communities where we operate. And if you haven't seen it yet, we proudly published our first corporate sustainability report that details our sustainability program. I hope you'll take the time to review it. So sustainability is an important aspect of our investment profile and has been a significant part of KEMET's culture for many years. We think strategically about the future with an eye towards global megatrends, electrified and connected world, energy efficiency, safety and product innovation. Anticipating and planning for these trends will be critical as we capitalize on strategic growth opportunities that align with our strengths and are adjacent to our existing products.

Over the next 5 years, we expect the following: to achieve organic revenue CAGR growth rate of at least 5%; grow revenue through acquisitions at a CAGR rate of 5% by the end of the fifth year; and develop a disciplined capital allocation strategy to enhance shareholder value and return.

Finally, I want to remind everyone that KEMET is celebrating its 100-year anniversary this year, and we will be ringing the closing bell at the New York Stock Exchange on June 12 to commemorate this achievement. We believe the future of KEMET is bright because of our strong financial position, investment in innovation and diverse portfolio of differentiated electronic component solutions, our customers demanding the higher standards of quality, delivery and service. We have the balance sheet to provide flexibility to achieve our growth plans in place and thanks to all of our hard-working employees around the globe that makes all of this possible.

Operator, we'll now take 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 Maynard Um with Macquarie.

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Maynard Joseph Um, Macquarie Research - Analyst [2]

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You’re guiding gross margin to be down sequentially in the 33.5% to 35% range after a stronger 33.5% this quarter. If I walk through your business segments, and I look at F&E should see some benefits from the Granna plant closure. MSA should seeing some seasonal build benefits returning gross margins, I assume back to that 20% level. And I would have thought the capacitor business would have been relatively stable. So is this a function of mix? Or are you seeing gross margin impact somewhere? Or is there just a level of conservatism there?

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Gregory C. Thompson, KEMET Corporation - Executive VP & CFO [3]

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Maynard, this is Greg. Yes. I would say it's predominately mixed. The mix can move around quite a bit depending upon the channel of distribution. And as we talked about distribution, there is some -- a little bit of the inventory correction still going on there, and that tends to be a little bit higher gross margins for us. So that's part of it.

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Maynard Joseph Um, Macquarie Research - Analyst [4]

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Okay. And was there inventory -- so the inventory correction will be greater in this following quarter than it was in fiscal Q4?

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William M. Lowe, KEMET Corporation - CEO & Director [5]

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Maynard, this is Bill. I think -- continue -- when we look at what's correcting actually in the distribution channel that affects us the most, I mentioned it was tantalum. So we're seeing there's probably 2 quarters. And I think anybody who attended the EDS and heard what the distributor said, there's probably 2 more quarters of correction related to inventories, both for those that are dealing with small case size ceramics and in the tantalum. A lot of the Asian distributors put a lot of tantalum into their channel, and that's having some effect on us.

But another thing I'll say from a positive note is, we're larger in polymer than we are in the older technology MnO2, and I think that while you see a slight change in margin, it's actually very small. So I think we're well positioned regardless of as these -- as this transition takes place of normalizing the inventories in, say, the tantalum space. We actually have more -- we actually produce more polymer than we are MnO2. And that's our premium product, we're the leader in that. And so we'll see some effect what you're seeing in those margins for that mix, but it's not significant.

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Maynard Joseph Um, Macquarie Research - Analyst [6]

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Okay. And then on the ceramic side, you said you're still running at a full capacity, if you look at the market on the automotive side, probably weaker than people might have hoped for the full year, does that impact your capacity at all for the full year? Or is demand continued to be pretty strong that we should continue to expect the supply/demand imbalance through the rest of this year?

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Gregory C. Thompson, KEMET Corporation - Executive VP & CFO [7]

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Yes, I think we are in a unique situation, in addition to the standard market demand in the automotive segment, which continues to remain strong. You have the competitors' strategy changes that have occurred. And that continues to drive that supply/demand gap. So as I mentioned in my formal remarks, even as we see unit volume potentially pull back a little bit in automotive, our except -- our current projection would be that we'll continue to run the way we're running today. We’re not pulling back on adding additional capacity.

We're still doing some expedites for some OEMs. It's not as much as it was before because of the inventory correction happening in distribution. That's actually helping us, as I said. So our view at the moment is, yes, it's going to continue strong, but the combination of both increased content, and competitor strategies have created a gap that is still -- where we’re still working to make sure we fill.

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Maynard Joseph Um, Macquarie Research - Analyst [8]

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And does the inventory correction have any impact on your pricing to the OEMs?

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William M. Lowe, KEMET Corporation - CEO & Director [9]

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We have, as you may remember, we typically negotiate our contracts on an annual basis, which are typically negotiated in the fall, which go into effect in January. So we'll see where we are as we get into next fall for the following year, but right now, we're under our contracts that we negotiated 6, 7 months ago.

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Maynard Joseph Um, Macquarie Research - Analyst [10]

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Okay. And then just lastly, on the OpEx side. And I think I might have missed the comment. But on sales and marketing, I think, last year, you had higher accruals due to your outperformance. How should we think about that heading into this fiscal year? If I just annualize your Q1 guidance at the midpoint, looks like it will be up slightly on a year-over-year, while I would've thought that would be flat or down on a year-over-year basis.

And then similarly just on R&D, what are the primary drivers of that increase and shall we think about that being pretty stable throughout the rest of the year?

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William M. Lowe, KEMET Corporation - CEO & Director [11]

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Yes, let me take the R&D first. We're actually trying to increase our R&D spend as if -- we're trying to keep it as a percentage of revenue, been trying to get to that 3.5% to 4% kind of number. Without R&D, future products that don't exist today, won't exist tomorrow. So we definitely need to make sure we're spending the right amount on R&D. And in the past, we've probably underspent R&D a little bit. So it's -- R&D will be in the range that Greg mentioned, and I think you'll see that more on -- not that range, on a quarterly basis.

SG&A, I think, we're still spending on a lot of the SOX compliance work that will continue into this next fiscal year as we have to do more cleanup in that area. So I think initially in the first part of the fiscal year, there are some expenses this year that we didn't have last year that's kind of offsetting as the expected decline that you were referring to, which would have occurred without those expenses probably.

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Operator [12]

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

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [13]

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Just following up on Maynard's questions, specific to the tantalum business. Could you tell us what the channel inventory stood at in terms of months? And where it was?

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William M. Lowe, KEMET Corporation - CEO & Director [14]

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The -- overall, the turns in distribution are running close to 3, somewhere between -- depending upon the distributor, on average, it's probably between 2.5 to 3 turns at the moment. We really prefer them to be around 3 or more. Some distributors are more than that. The high service channels are still turning faster than that.

But overall, blended that's that. What we like -- what we're happy to see, Matt, and I mentioned it in my formal remarks is that the book-to-bill number for our distributor partners overall is a -- is still positive at 1.02, and I think that's a good sign.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [15]

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And what was the book-to-bill for the overall company again? Was it above 1 still?

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William M. Lowe, KEMET Corporation - CEO & Director [16]

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Overall, for the entire company it is -- we're below -- overall, let me just you give you a breakdown between distribution and OEM. So I think it's important, as I've said, the change in distribution is actually helping us with our -- at least our ceramics picture and the OEM side.

The OEM book-to-bill is about right at 1, distributions somewhere between 0.75, and the overall will be about 0.85.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [17]

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Okay. So -- okay. But you -- so you said distribution was 0.75, but earlier, you said it 0.102.

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William M. Lowe, KEMET Corporation - CEO & Director [18]

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No. The distributor's book-to-bill of our product.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [19]

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Oh, their book-to-bill, I see. Got you, got you. I see. So there's...

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William M. Lowe, KEMET Corporation - CEO & Director [20]

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Right. And I think that's a positive sign from the standpoint of what they're selling out and what the demand of our product is from a booking standpoint.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [21]

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Yes. Okay. And then you did talk about pricing, and obviously, you've benefited both on tantalum and ceramic, and you've talked about increasing pricing to OEM customers January 1. You already did that in distribution. How is that playing out for you?

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William M. Lowe, KEMET Corporation - CEO & Director [22]

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Just fine.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [23]

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So they're sticking. What -- is there expectations though, as we get through this correction with tantalum, that you'll see at least a return to more normal ASP pressures and pricing pressures?

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William M. Lowe, KEMET Corporation - CEO & Director [24]

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Yes. I think in the tantalum side of the business, I think, certainly, we're seeing a little bit of that even today. Especially on the MnO2, which is where most of the pricing pressure is and would be expected to be. And as I emphasized in -- earlier, we have been focused on polymer technology. And so we are the leader in polymer. We have crossed over where polymer, from a value perspective, is the larger part of that business.

So yes, there is an impact that's coming from MnO2 and ASP pressures, which will probably continue through this year in a more normalized fashion to your point. But again, that's not 100% of our business in the tantalum space. And so we expect to be cushioned a little bit by that.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [25]

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Okay. And on the MLCCs, you talked about, obviously, the fact that you're in the right part of the market and you have some competitors walking away from some of the large case size. And we have heard that certainly, one of the biggest competitors, I guess, just discontinuing early next year. Is that -- do you get a sense that, that's still playing out? Or will competitors see that opportunity where you're seeing better margins, your ASPs are increasing, where they may come back to some of those product lines?

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William M. Lowe, KEMET Corporation - CEO & Director [26]

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At the moment, what we're hearing is that they're continuing with their strategy. I think their strategy is -- their -- how do I phrase this? They lengthening out the time frame as they exit, but they're still exiting. So I think the impact -- what's happened is the impact of their facility is running with less utilization for their small case size is encouraging them to continue to run some more large case size rather than completely back out at a -- on a kind of a cliff basis. That's actually probably a good thing for the market because their volumes are so high that if they were to have done that, the shortage would be even worse than it is today.

So what we've heard is that they are continuing with their strategy. It -- rather than being completed by whatever date that they originally had chosen, it might lengthen out a little longer. But again, I think that's actually favorable for the industry. Too quick of stopping that production at a 100%, whichever they -- whichever parts they've chosen to do that on, would be actually very detrimental to the market. So I think it's actually a good thing, but we've heard nothing that they have changed their strategy.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [27]

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And just last for me just regarding the contracts you have with the 3 customers that are basically paying upfront for capacity. Are there any other conversations going on with customers there? Or in terms of expectations, is that it for now?

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William M. Lowe, KEMET Corporation - CEO & Director [28]

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I think, that's it for now, Matt.

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Operator [29]

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(Operator Instructions) Your next question comes from the line of Craig Ellis with B. Riley FBR.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [30]

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Bill and Greg, congratulations on the execution both in the quarter and for the full year. I wanted to start just by understanding -- I wanted to start understanding some of dynamics in the quarter because revenues came in considerably above my expectations. Where on the business did we see outperformance in the quarter?

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Gregory C. Thompson, KEMET Corporation - Executive VP & CFO [31]

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Yes, I would say, it was pretty broad-based, but more focus on the Solid Capacitor segment. Ceramics, in particular, continues to perform the best. And that's where the greatest over-performance occurred, both from a volume perspective as well as through their different channels of distribution.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [32]

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And further clarification with respect to the outlook. 3%-ish decline, plus or minus, is that primarily the distribution impact that you've talked about and some of the rationalization that's going on there? Or are there other parts of the business that would just be seasonally softer in the June quarter?

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Gregory C. Thompson, KEMET Corporation - Executive VP & CFO [33]

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Yes. So I would say, the -- so it's 3% to 6%, if you compare it to first quarter last year increase. But I would say, yes. Distribution is the -- that correction that's going on is still continuing, in particular, as Bill said, in the tantalum area that's something we're still working through, that is impacting the tantalum business. To a greater extent, the MnO2 portion of tantalum, that would be the greatest impact.

Also, I would say, overall, the Asia-Pacific region, where MSA is focused, continues to be a bit weak, too. And so that's another thing pulling down the growth to the 3% to 6% range.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [34]

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Okay. And then taking a longer-term view and looking out over the course of the full year and not looking for guidance here, guys, because that wasn't provided, but trying to get a sense of how some of the drivers that you discussed stack up? Whether we're looking at the content gain in EV's or the potential to really start ramping 5G infrastructure, the leading SSD position where I think we're going to see tremendous elasticity of demand this year.

Harsh environments, those end markets have been doing well. If we look at fiscal '20, where does the company have its greatest confidence in business growth this year, and are there any headwinds we need to be aware of as we're looking out over a 4-quarter time period?

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William M. Lowe, KEMET Corporation - CEO & Director [35]

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Well, if you use the current environment with -- assuming that the Chinese tariffs don't get released because that, of course, would create a whole different dynamic. So in the current environment, we're still very -- we expect it challenging, but we're very optimistic about the year.

And specifically to your question, we expect to still see the ceramics' space continue to put out more volume as our continued past capacity comes online. We also expect to put those wins in 5G as polymer to kick in the third and fourth quarter of this fiscal year, which will help the polymer business from where they are today.

So we're optimistic that even with the challenges that some of the governments of the world have put before us that we have an opportunity to continue to have another good year. We're up -- our projection for the first quarter is up over last year's first quarter. And I don't think, any of us should be looking at 90-day windows, these days, about where business is going. So we are optimistic in a challenging environment that the company will do well this year.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [36]

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Excellent. And then following up on some of the gross margin questions and just understanding how the price changes that took effect late last year are impacting gross margin when pricing is negotiated and new prices go into effect, whether they're higher or lower, but in the most recent case, are very favorable for the company.

When do we see the benefit of those changes through the economics of the business? Does it all occur in the quarter immediately after the changes were implemented? Or is there a tail effect that would extend much longer than that? And in this year's case, how would that play out?

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William M. Lowe, KEMET Corporation - CEO & Director [37]

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Well, I think if we go back a couple of quarters, a couple of earnings calls ago, there was some price increases that went into effect in the quarter ended in September. There was some additional ones that went into effect in December. And then we had multiple contracts that went into effect between January and March 31. They all don't start effectively January 1.

So we have seen the effect of the price increases, primarily through March 31. There's probably some additional benefit rolling into this Q1 from the standpoint that not everything -- not all the contracts that were first calendar quarter went into effect right on January 1.

But incrementally, the bulk of the price increases are -- already are in the numbers. There's probably a little more benefit as we roll into Q1 as compared to Q4. But primarily, the price increases are already in there.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [38]

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That's helpful. Lastly, for me and then I'll get back in the queue. Thanks for providing the longer-term outlook with respect to the CAGR. So I just want to clarify, I think, I heard that there was a 5% revenue CAGR, then there was a comment around acquisitions, I believe. I wasn't sure I caught that right. But can you just restate (inaudible) some of the underlying assumptions, please?

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William M. Lowe, KEMET Corporation - CEO & Director [39]

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Yes. That's correct. We said a 5% CAGR on organic growth, revenue growth. And then a similar number, 5%-CAGR-rate growth for acquisitions over a 5-year period from that standpoint. So those are the 2 categories that I spoke to.

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Operator [40]

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(Operator Instructions) Your next question comes from the line of Marco Rodriguez with Stonegate Capital Markets.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [41]

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Most of my questions have been asked and answered, but I have a couple of quick kind of follow-ups and high-level type questions here. First, from the cash flows, your expectations for fiscal '20. I was wondering if you could talk a little bit more about cash flow going through the year. Obviously, you've given the CapEx guidance for the full year. And then if you can talk maybe about how that CapEx kind of rolls out to the quarters?

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Gregory C. Thompson, KEMET Corporation - Executive VP & CFO [42]

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Yes. So we would expect another good year of strong cash flow generation. So the CapEx for us can be a little lumpy. Guidance for Q1 is $20 million to $30 million. I guess I would expect that to probably be higher in the second quarter and then taper off some after that. The -- and then I guess, I should say, longer term -- this is really -- with all the capacity additions as well as the IT infrastructure investments that we're making, FY '20 will be another year, like FY '19 was, of elevated CapEx. But after that, so into the following year, we would expect CapEx to get back down to what I would consider to be more normal sort of levels, so kind of a D&A sort of replacement rate or something closer to 5%-or-so of our revenues going forward.

And so -- and overall, the working capital, everything remains very tightly managed there. So EBITDA is will -- a lot of that will drop in terms of cash flow generation.

The only other thing I should mention is, so we do have the runoff of the -- those acquired antitrust liabilities related to the TOKIN acquisition from a couple of years ago. And that will -- that's still a pretty, pretty significant amount. I think it's around $30 million, $40 million or so of further cash outflow that we would expect in FY '20.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [43]

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Got you. And then maybe if you can just talk a little bit about capital allocation policies for this fiscal '20? Just where...

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William M. Lowe, KEMET Corporation - CEO & Director [44]

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Yes. As I -- well, as I said, we plan to develop what that cap allocation strategy looks like with the Board of Directors in the short term, so I would say, stay tuned. And on maybe our next call, as we get into our Annual Shareholder Meeting, we'll have something further to say about that in a little more detail.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [45]

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Got you. Okay. And then in terms of the acquisitions, I think, it's been a little while since we've heard you guys talking about potential acquisitions. Maybe if you can provide a little color there as far as what sort of expectations you might have there in terms of types of targets or space or geographies. Any sort of color you can provide there in terms of what the acquisition landscape may look for you guys.

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William M. Lowe, KEMET Corporation - CEO & Director [46]

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Yes. I'll add onto some of the public comments we have made already in the past when we've loosely talked about where we think we should be growing. Some of it is in the Magnetics and Sensors space, potentially. We're also looking in other areas that's adjacent to our components that are already on the board. So we're looking to not just stay necessarily in the capacitor space, but maybe move with the value chain a little bit.

And just to put in perspective of what a 5% CAGR rate is for the 5 years -- at the end of 5 years, it's fairly close to a $500 million kind of number over that -- at the -- by the end of that period, if you were to run those -- both of those numbers.

So we're looking across the space. We're certainly focused in building our MSA group and making that be a bigger, more important group. And that would primarily, probably, be geographically, as is most electronic components. Geographically, it's probably more focused in the Asian market.

And of course, that's where we've done our financing. Our financing, as you know, was done through a group of Japanese banks, and we're happy to continue that relationship and look to use them as our partners as we do some of this expansion.

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Operator [47]

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(Operator Instructions) Your next question is a follow-up from Maynard Um with Macquarie.

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Maynard Joseph Um, Macquarie Research - Analyst [48]

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When do you think we start hitting the volume ramps in 5G? Is that a fiscal '21 time frame? And any thoughts on how that might impact supply, is there enough industry capacity today to fulfill that growth? Because I know you guys paused some of that capacity build there on the polymers side from the original plan. But any thoughts there?

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William M. Lowe, KEMET Corporation - CEO & Director [49]

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Yes, you're probably right, Maynard. The largest ramp -- and I've seen, we've all seen the various comments -- commentary that has been made about the ramp of 5G. I think the majority of it probably is into '21 and '22 for us. And so we have -- I think we have the -- we'll have the ability to determine how we -- if we need to and what timing-wise to add additional capacity in polymer if that is what's required.

So I do think it's -- there's a lot to talk about 5G. It is coming. We're seeing awards now. But I think the bigger awards and the more implementation of that probably is out into fiscal '21 and '22, which is a good sign. That's continued growth -- from my point of view, that's continued growth over several periods of years.

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Maynard Joseph Um, Macquarie Research - Analyst [50]

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Right. I guess I was looking at it from perspective of pricing if we get into another period of tightness. Do we see capacity adds and CapEx spends, and during that time frame, we see pricing strength?

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William M. Lowe, KEMET Corporation - CEO & Director [51]

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Well, just all I'll comment is on that -- the Economics 101 would indicate that if supply was tight and demand was high, then you'd probably see pressures on prices going up versus down.

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Maynard Joseph Um, Macquarie Research - Analyst [52]

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Okay. And then can you just talk about whether you have -- what sort of strategy changes or things that you're planning to implement now that you've been in the CEO seat? I presume, a lot of it is steady as she goes, but maybe you can share sort of some of your insight in terms of what your plans might be.

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William M. Lowe, KEMET Corporation - CEO & Director [53]

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Well, I think as I have signaled a little bit by my final commentary today regarding what we plan to do from both not just an organic growth perspective that's where we are to just taking what we have today and growing it over a period of time but also putting us on a path to grow inorganically and not necessarily just in the capacitor space and then, thirdly, developing with the Board a more robust capital allocation strategy to return value to our shareholders.

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Maynard Joseph Um, Macquarie Research - Analyst [54]

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Okay. From -- just from an M&A perspective on the balance sheet, any targets to think about in terms of potential debt raises?

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William M. Lowe, KEMET Corporation - CEO & Director [55]

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No. I mentioned that we're -- most likely, especially, if we -- if the targets end up being in Asia, we'd be looking to utilize our bank group that we have in Japan. That will minimize, of course, the interest expense that would hit the P&L, and we have the flexibility to do quite a bit there. So I think that's where we'll see that coming from.

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Gregory C. Thompson, KEMET Corporation - Executive VP & CFO [56]

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Yes. And I would just add to that, we have -- as we said in our remarks, we have a lot of flexibility in the balance sheet with 1x levered currently and also some excess cash that we could deploy if we saw the right target.

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Operator [57]

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There are no further questions. Gentlemen, the floor is yours for any closing remarks.

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William M. Lowe, KEMET Corporation - CEO & Director [58]

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Thank you. We appreciate everyone attending today, and we'll talk to you at our next earnings call in July on our Annual Shareholder Meeting. And look for us to be ringing the bell at June 12 at the closing bell at the New York Stock Exchange.

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Operator [59]

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Thank you, ladies and gentlemen. This concludes KEMET's Fourth Quarter Fiscal Year 2019 Earnings Conference Call. You may now disconnect.