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Edited Transcript of KEM earnings conference call or presentation 31-Jan-19 2:00pm GMT

Q3 2019 KEMET Corp Earnings Call

SIMPSONVILLE Feb 1, 2019 (Thomson StreetEvents) -- Edited Transcript of KEMET Corp earnings conference call or presentation Thursday, January 31, 2019 at 2:00:00pm 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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* 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

* Michael Joshua Nichols

B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group

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Presentation

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Operator [1]

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Good morning. My name is Polly, and I will be your conference operator today. At this time, I would like to welcome everyone to the KEMET's Third Quarter Fiscal Year 2019 Earnings Conference Call. (Operator Instructions) Thank you. I'll now turn the conference over to Mr. Richard Vatinelle. Sir, you may begin.

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

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Thank you, Polly, 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 third quarter of fiscal year 2019 ending December 31, 2018.

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 the website that should help you follow along in the financial portion of the presentation. Before we begin, we'd like to advise you that all statements addressing expectations or projections about the future are forward-looking statements.

Some of these statements include words such as expects, anticipates, plans, intents, 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 or 10-Qs and our registration filing statements for additional information on the risks and uncertainties.

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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Thank you, Richard, and good morning, everyone. Before I begin my comments on the quarter, let me say that we are excited to let you know that KEMET is celebrating its 100-year anniversary this year. We began in the year 1919 and made our first capacitor in 1958. And we've been a part of innovating the electronics industry through many challenging decades, and you'll be hearing more about our history as we go through the calendar year. Our anniversary logo is on the title page of the web slides for this call.

Well, it has been an interesting third quarter to say the least. I may hold the record for the shortest retirement on record as well. But I'm energized with the opportunity to lead the KEMET team. We've been in the trenches together for over 10 years and the quality, dedication and professionalism of the team is unmatched. We are all working to bring value to you as shareholders every day.

Now on to my comments. There is a lot of noise in the world and in several markets and regions. So I'll spend a few minutes with our views on the overall environment, and then I'll turn it to Greg to review the numbers with you. And then I'll provide some granular information on the regions and markets after Greg. As you've heard from others in our industry, there is no doubt that during our third quarter, we're seeing a bit of a general slowdown, driven primarily by Asia. As a result, lead times in some product lines are coming down, and those product line lead times are closer to the norm as we enter the fourth fiscal quarter. The China tariffs are definitely having an overall effect in influencing the slowdown that we see in some markets and channels.

The purchasing manager index, for instance, the PMI has dropped below 50 in China for the first time in 2 years. And we had a minor impact from the Christmas season in some customers rebalancing of inventory at December 31 that was somewhat unexpected and impacted our revenue slightly for the quarter. But strong product mix drove margins and operating profit above our forecasted range.

The electronics industry across all markets continues to deal with significant MLCC shortages. The only area that has seen any noticeable relief in recent months is small case size MLCCs, which are the most commodity-oriented. The demand-driven slowdown in Asia and smartphone growth has led to additional product availability for small case size, and Asia consumes significant quantities. This has led to some reductions in lead times and the stabilization of the pricing environment for those products. But let me remind you that we do not play in the small case size MLCCs that are used for the smartphone market, and that the general slowdown does not have a direct effect on the company and our MLCC business.

For noncommodity products like higher capacitance, larger case size and value-added automotive MLCCs, the market remains constrained. This is where we focus. Lead times are still extended in these areas, and the pricing environment continues to be more favorable. KEMET's overall ceramic product mix is more weighted in these noncommodity segments compared to the large Asian-based MLCC suppliers. More than 50% of our ceramic product line is directed towards automotive.

KEMET's core customers as well as new ones continue to ask KEMET to step up and significantly increase capacity so that they can grow, particularly in automotive, telecom and industrial markets.

And I'm proud to say that even with our capacity running high, our quality remains second to none, with quality issues remaining at the very lowest levels.

During the quarter, we announced our second customer capacity agreement, bringing the total number of pieces under these agreements to $21 billion. This capacity is expected to come online primarily during fiscal year '21. And if you're thinking about what fiscal year that is, that's April 2020 to March '21. Exclusive of these agreements, our plans have not changed, and we will continue to be adding additional capacity in fiscal '20, beginning this April 1. During the calendar year, about 14% of capacity as we exit the fiscal year will be the increase. We'll see about 8% of that capacity having an effect during the fiscal year itself with additional piece count over the course of that fiscal year.

Our backlog and other product areas remain strong and will continue to support growth as we roll into the next fiscal year. And our pipeline design wins remain strong and will drive revenue during next fiscal year in a multitude of areas, including 5G and automotive wins in EMEA in our Magnetic, Sensors & Actuators Business Group.

Now I'll turn the call over to Greg to recap the numbers for the quarter. Greg?

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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 want to say it's a real pleasure to be here at KEMET. I'm looking forward to working with Bill and the leadership team to continue to deliver excellent operating results. I'm going to begin my review on Slide 4, if you are following along on the website. Revenue for this quarter was $350.2 million, up 0.3% over our September quarter and up 14.2% compared to Q3 last year.

GAAP net income was $40.8 million, and our non-GAAP adjusted net income was $63.1 million in the current quarter compared to $18.6 million and $30.6 million, respectively, in the same quarter in the prior year.

GAAP gross margin was at 35.3%. Non-GAAP gross margin came in at 35.6%, up 250 basis points from last quarter and up 540 basis points from a year ago. This was a strong operational performance, supported by continued strength in our MLCC business, driven by higher volumes and price increases and also continuing cost-reduction projects across the board.

GAAP diluted EPS was $0.69, and non-GAAP diluted EPS was $1.07, up $0.20 from last quarter and up $0.55 from a year ago. Our adjusted EBITDA for the quarter was $82 million. That's an increase of 65% from the $49.7 million in the same period in the prior year and up 13.2% or $9.6 million over our second quarter that ended this past September.

In the last 12 months, adjusted EBITDA margins have steadily increased over the last 2 years from 13.6% for the period ended December 31, 2016, to 19.3% for the current period.

Now turning to Slide 5. Our non-GAAP SG&A expenses came in below our forecast at $43.8 million and were down $45.3 million in the prior quarter. SG&A for the quarter includes a onetime $1.5 million expense reduction, resulting from the prior CEO's forfeited long-term incentive plan.

Taxes this quarter were $2.6 million, which was a little below our stated forecast.

Now let's move to Slide 9. Capital expenditures during the quarter were $37.2 million compared to $24.5 million in the prior quarter. We expect our CapEx spend will continue to grow quarter-over-quarter as we ramp up our efforts to increase capacity. This coming quarter, so the fourth quarter, we expect to spend in the range of $50 million to $60 million for capital expenditures. As stated in the last earnings call, we continue to expect capital expenditures for the full year ending March 2019 to be in the $120 million to $130 million range. This level of capital expenditure is a big increase for us and includes significant projects to increase our ceramics and polymer tantalum capacity as well as improvements to our IT systems and infrastructure around the world.

During the quarter, we closed on a 6-year term loan facility through our Japanese subsidiary, TOKIN, for an amount of JPY 33 billion, which is approximately USD 292 million as of the funding date on November 7, 2018. The proceeds from the term loan facility were used together with cash on hand of about $31 million to prepay in full, the $323.4 million outstanding principal amount under the prior term loan credit agreement.

The new facility is in the form of 2 term loans of JPY 16.5 billion each or USD 150 million. One loan with amortizing by annual principal payments of approximately $12.5 million and the other was a bullet payment due at the end of the 6-year term. Both term loans carry interest rates based on the Tokyo interbank offering rate called TIBOR, plus a margin of 2% and 2.25%, respectively. For reference, the 6-month TIBOR interest rate as of today is 1.8% or 12.5 basis points. So obviously, KEMET is in an even stronger financial position with the refinancing of our long-term debt behind us. We expect to see interest savings of approximately $21 million annually as a result of this refinancing. We have $234 million of cash and cash equivalents on hand as of the end of the quarter, and also net debt stands at $71.3 million.

Now I will turn the call back over to Bill.

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

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Thank you, Greg. And if you're on the web slides, you can follow along on slides 14 to 18 in the presentation deck as I start this section.

So we'll turn to the business groups first. Solid Capacitors revenue increased $3.2 million as compared to the prior quarter or approximately 1.4% to $238.7 million.

Total revenue increase was significantly impacted by continued strength in the distribution channel, while EMS was flat and OEM was down. Looking at the 2 product lines, revenue for our tantalum business was down $4.4 million in the third quarter versus Q2, but up $17.1 million or 13.5% year-over-year. Quarter-over-quarter revenue decline was driven primarily by softness in Asia and seasonal effects in our distribution and automotive business, associated with the end-of-the-year holiday shutdowns. The improvement year-over-year is due to continued success in our tantalum polymer product development and growth initiatives. These new products continue to drive high interest across multiple segments. The ceramics product line revenue was up $7.6 million quarter-over-quarter, driven by additional available capacity and some price increases.

The demand for large case MLCCs remain strong and is expected to continue throughout the next fiscal year. Gross margin in the third quarter was 44.1%, an improvement of 390 basis points over the prior quarter. This result was driven by increased revenue, favorable mix and improving cost performance.

The book to bill did softened, but we ended this quarter with a solid backlog and expect revenues to remain relatively flat over the third quarter performance.

On a year-over-year basis, third quarter 2019 revenue increased $43.6 million as compared to the same quarter in fiscal 2018 or approximately 22.4%. Gross margin percentage improved 760 basis points year-over-year and was driven by continuous improvements in revenue, product mix and manufacturing performance impacted by annual cost-down initiatives.

Our Film and Electrolytic business revenue was $50.2 million or $0.5 million lower than the prior quarter and $1.3 million lower than the same quarter in the fiscal year 2018. Revenue slowed in the OEM channel during the third quarter, mostly in the EMEA region. Gross margin was 13.5% compared to 12.4% in the previous quarter, up 110 basis points. The good manufacturing performances and consistent capacity utilization contributed to the higher margin in the third quarter. And additionally, the company announced the intention to close the Granna manufacturing facility in Sweden to further improve the gross margin in the coming quarters. For Magnetic, Sensors & Actuators segment, revenue for the quarter came in at $61.3 million as compared to $63.1 million in the previous quarter, up $1.3 million from the same quarter in fiscal 2018.

Gross margin was 19.2%, which was a decrease of 100 basis points from the prior quarter. The decrease was a result of a number of factors, which included an unfavorable product mix, some price pressure in the antenna unit business and some slow moving in the semiconductor equipment segment, which impacted demand for piezo actuator products. Demand for piezo transistor products for the fishfinder applications remains stable.

Now the regions. Europe closed with $77.1 million, which was basically flat, down from the previous quarter and up 12% compared to the same quarter last year. POS came in a little lighter than expected, but still strong for a Christmas quarter for the EMEA region. We closed at $53 million. That's about minus 4.2% decrease from the prior quarter and a 24.7% increase from the same quarter year-over-year.

On a macro level, we can see the European market flattening. Automotive continues to be solid despite negative impacts coming from the diesel introduction, which caused German car manufacturers to delay their car deliveries.

In the Americas, revenues closed at $91.4 million, an 11% increase from the previous quarter and a 40.4% increase compared to the same quarter last year. The increased demand was seen across all channels and segments. The POS for the quarter was down 6% compared to the previous quarter, but up 43.8% compared to the same quarter last year.

In Asia, revenue closed at $133 million, which is a 3.9% decrease from the prior quarter, but a 7% increase compared to the same quarter last year. POS closed at $54.1 million, which is down 19% from the previous quarter and a 3.8% increase compared to the same quarter last year.

We believe the slowdown is primarily due to the year-end inventory control at our customers and some inventory corrections at our distributors as supply chain of some of those product categories showed some signs of relief. Overall, the Asia market is still positive, and automotive, cloud and 5G will continue to lead the demand in Asia. The team will continue to drive demand creation with a focus on those products that best respond to customer design needs.

Q3 revenues for our fourth region, which is Japan and Korea, closed at $48.7 million, which is a decrease of 4.2% versus the prior quarter and an increase of 0.6% compared to the same quarter last year. This was due in part to lower shipments of the piezo actuators, I've mentioned previously, which is used in the manufacture of semiconductor manufacturing equipment and the antenna products for gaming modules. However, the memory alloy materials for medical instruments continued to be very stable.

For distribution, POA generated $151.8 million in revenue, representing a 5.1% increase compared to the prior quarter and a 27.1% increase as compared to the third quarter of fiscal year 2018. POS coming in at $167 million, declined by 10% for the quarter and grew 20% as compared to the third quarter of fiscal year 2018. Inventory in the channel grew a little more than we would have liked, but we continue to work with our distribution partners to ensure that they balance POA with POS to prevent unnecessary inventory build.

Book-to-bill overall for the company is hovering around 1%, with Asia trailing in the negative area at around 0.85%.

Lastly, let's take a look at our performance by market segment. And of course, we do have a chart in the deck on this for you to reference if you don't catch all the numbers. So on a percentage basis, on a percentage of revenue basis, the consumer segment rose to 15%; the industrial, computer, automotive and telecommunications segments remained stable at 26%, 21%, 15% and 14%, respectively. The defense and medical market was down slightly to 9%, and again, you can find those percentages on Slide 17.

So now through our forecast. We believe the overall softening we see in the market will continue in the next quarter. However, our ceramics product line will continue to show an increase in revenue. They will offset a substantial portion of the softness in the other businesses. Generally, on a seasonal basis, the March quarter is generally softer for us as products we produce for the consumer segment declines over the December quarter, and we also see an effect from the Chinese New Year. This is especially true this year with the Asian regions perspective and the consumer segment driving the softness next quarter.

With this as a backdrop, we expect sales to be up approximately 8% to 8.5% over last year's fourth quarter, but down sequentially versus quarter 3 this year of about 2.5% to 3%. The non-GAAP gross margin will continue strong between 33.5% and 35%. SG&A will hold steady at around $44.5 million to $45.5 million. R&D will be in the range of between $11 million to $11.5 million, and taxes between $2 million and $3 million approximately.

While we're not yet ready to forecast next fiscal year for you, our view is optimistic that our ability to grow revenue this coming fiscal year. Even after a year where we will have seen substantial top line growth, there is some softening in some markets. But however, as I said earlier, our pipeline of award wins continues and will drive revenue in fiscal '20 and '21. And there is a view that 5G rolling out soon would also provide a catalyst for another leap in technology during the decade beginning in 2020 that we haven't seen in many years. There may be a softening for a quarter or 2 for all the reasons I've already mentioned. But in our view, the long-term trend continues to be growth in electronic components. Our ceramics product line will continue to lead the charge. And in the next fiscal year, infrastructure advances, such as 5G, will begin to have an effect in our tantalum polymer line. The growth in EV and the automotive segment and general vehicle content will also be a positive factor, helping offset the forecasted decline in vehicle production.

We'll be able to give you a better look at that when we wrap up our fiscal year on our next earnings call.

And with that, we'll take any questions that you have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first 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 [2]

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Just a few questions from me. The first is just regarding your book-to-bill. I know you gave some numbers at the end. Could you go over that again, the book-to-bill?

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

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Yes, what I said on book-to-bill, Matt, was a generally -- overall, we see kind of -- it's right around -- hovering right around the 1% number. And I said that Asia was -- we're looking at kind of more of a negative number of 0.85%.

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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 in terms of the outlook, it sounds like ceramic is so doing well because of the lead time issues and then you're seeing either end-market weakness or inventory correction in some of the other markets. And so on those other products, I guess, the question is, how long do you think this correction is going to take? And then on the pricing side, because I know pricing across the board has been at least firm if not going up until recently. Would you expect some ASP pressures in those areas which would obviously put some margin pressure on the business?

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

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I think I'll have to break that down a little bit into a couple of different product areas. If you look at MSA, for instance, we talked about the consumer segment softening a little bit. And that's traditional that this quarter, as I said, we see that regardless of changes in the economy. And that we have -- in the gaming side, for instance, we see a lot more sales in the time frame from October to December or September through December than we do in March for that gaming industry. So from an MSA perspective, we expect that to be relatively temporary into -- for this fourth quarter, we'll see some rebound in that as we roll into the first quarter of next fiscal year. And if you break tantalum, really, into 2 areas, there is more pressure today on the MnO2 products as more of that capacities come online from some of our competition who had some production issues over time during last calendar year. So there is a little more pricing pressure there. But in summary, as we -- as you know, we've chosen not to play at some of the low-end commodity areas. But there's a little more pressure there. Polymer is holding its own from that perspective. But I think as -- it's not unusual that as things normalize and lead times come in that you start to come back into the more normal discussions on pricing as you move forward.

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

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Okay. And then the MLCC area, I know you've talked about putting price increases through distribution, which seems have showed up in your margins already and then OEM pricing going up, I believe, at the beginning of this year. So the question there is, are they going to -- I mean, how locked in are those ASP increases, particularly if your customers see demand weaken, or more capacity comes online from some of your competitors?

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

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Well, I think we don't -- large case size at the moment is still very constrained, and it's going to stay constrained for the foreseeable future, I think. We do our OEM contracts annually. We honored our contracts all last year as we said. We would expect our customers to honor their contracts. So we just entered it start of January 1. And in the distribution side, again, we've just recently signed a new agreement on the capacity increases there. So I think the view there is that the large case size is staying constrained and I -- while we won't be seeing more price increases other than we've probably already put into play. I would expect it to be relatively stable on the pricing side going forward.

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

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Okay. And just last question regarding CapEx. I just want to confirm. I think you said you expect about 14% capacity add in fiscal '20, mostly all on the ceramic side and that -- so that's one? And the second is in terms of CapEx, which I know was up a lot this fiscal year. Do you expect to bring that number down next year, which obviously would help your free cash flow?

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

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Yes, let me answer the first part of your questions. The answer is, yes. What I -- the 14% is the amount of capacity adds that will be in place as we exit the fiscal year. The effect of the installation during the fiscal year will allow us to see about an 8% volume capacity increase during the fiscal year. So from an actual parts out the door, it's an 8% increase but we'll be in a position to have, as we exit the fiscal year, at the 14% level. So you remember that correctly.

Regarding CapEx, I think CapEx will come down. However, we need to look at -- you need to also consider the fact that with the customer contracts, those dollars will run through and appear to be CapEx. So we will, during the next fiscal year, have to tell you more or less separate KEMET dollars from customer dollars. So if our CapEx spend will actually -- from a sure CapEx dollar perspective, will look higher because those dollars will be in there. But we'll separate that out. But I think KEMET dollars will still -- will be less than this year but will still be more than what we've spent, let's say, our last -- the previous fiscal year where we spent $65 million, will probably still be above that because we are spending KEMET dollars to expand ceramics on our own in addition to the customer contracts. And there'll be some additional polymer expansion as well.

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Operator [10]

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And your next question comes from the line of Josh Nichols with B. Riley.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [11]

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I just want to ask if you can provide some additional detail. It looks like book-to-bill is doing okay, except for the Asia region. Could you comment, specifically, how much of the company's business is more tied directly to China? And how much of that quarter-over-quarter revenue slowdown for the March quarter we're seeing is tied to China versus the other regions or segments that you're operating in?

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William M. Lowe, KEMET Corporation - CEO & Director [12]

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Well, it is the majority of a slowdown, the percentage step that we saw a slowdown in Asia, and the quarter-over-quarter was a 4%, that was a 4% decrease. So it dropped at $133 million. There was a substantial piece of that, it was really in Asia. That said, Americas has actually closed up from the previous quarter. And I think Europe was more or less flat. So what you saw in Asia and also in our Japan/Korea region, which is a smaller region, but it also decreased 4%. So between Asia taking -- and most of that is China, by the way. When we say Asia, that's primarily China and then Japan/Korea, both those areas decreased. So that's the majority of the decrease.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [13]

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And then congratulations on the new term loan, favorable terms there, of course. I was going to ask, have you entered into any currency hedges in that regard?

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

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We actually have. We've actually entered into 2 swaps that effectively eliminate the impact of the currency fluctuations between the yen and the dollar on that transaction.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [15]

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And then I was going to add some more of a capital allocation question. So I know the company's been open to some M&A. But you have a pretty hefty cash position at this point and now with the refinancing done. What are the company's thoughts on how they might put that capital work as far as keeping some portion of a safety net, M&A, potential share buybacks, whatever it may be, and the dividend policy, of course?

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

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Well, first we -- you're right, of course, we instituted our dividend for the first time last quarter, first time in the 100 years of the company and that we're comfortable with doing that. And as we announced again this morning, we pitched to the board, declare the quarterly dividend. I think we are constantly looking at where is the right place to deploy our capital. And of course, right now, we're spending quite a bit on CapEx. But the return, when you look at our margins in the Solid Capacitors business group running around 44%, is a really good place to put your -- put some of your capital dollar spend, which we are. So we have a significant piece going there. We're still always looking for where is the next adjacent, as we've talked in the past about what's adjacent to us that might be an appropriate acquisition, for instance, to add to the KEMET portfolio of products. And that's an ongoing process, and I really can't talk specifically about any one particular area at the moment. And we will evaluate that and have a discussion with the board, more or less quarterly about the direction, strategic direction of where we deploy our capital.

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Operator [17]

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And your next question comes from the line of Maynard Um with Macquarie.

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Maynard Joseph Um, Macquarie Research - Analyst [18]

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A question about the price increases. And I'm wondering if they actually came through in the contracts, and in part, because your guidance for the sequential increase. Is the price increase being offset by unit weakness? I would have anticipated a bigger positive impact on that sequential revenue growth. And actually, particularly, a stronger benefit to gross margin since price increases are 100% gross profit. But your gross margin guide was only about 50 basis points higher than the guide you gave for the December quarter. So just wondering if you can provide some color around that. Is that just some level of conservatism or are there other puts and takes I'm not thinking about?

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William M. Lowe, KEMET Corporation - CEO & Director [19]

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Well, Chris, I didn't isolate the ceramics group, and I really prefer not to talk about specific dollar amounts for pricing increases. But we did say -- you are right that there are -- that the larger price increases went into effect in January. So there is some -- in this current quarter, there is some price increase. And there is larger -- there'll be larger dollar amounts reflected in the ceramics product line numbers or in Solid Capacitors business group. However, there is a general softening that we're seeing, not just in some of the tantalum space that was offsetting that, but also in our MSA business group, which is, again, affected by not just gaming, but it's also affected by the slower cell phone sales as Apple, for instance, has indicated on their iPhones. We do sell flex suppression sheets into the iPhones and with those sales being down somewhat, that affects the MSA business. And so with -- and that's a -- that affects our margins in MSA. It also affects our revenue. And then we're seeing a bit of a slowdown in EMEA in our F&E business group. So when you look at where the puts and takes are, ceramics is on a stand-alone basis. If I could isolate that for you, which we don't isolate that all the way down the page, all those positive effects would be in the numbers. But it is offset by a softening in actually the other product lines. And those product lines have different reasons why, in the particular fourth quarter, they're a little softer. We've a game -- we have gaming and cell phone sale decline [setting] MSABG, and then we have a softening -- flattening and softening in Europe in automotive for the F&E group. So it isn't just isolating what's happening in Solid Capacitors. So on a consolidated basis, it has -- that has an effect on that. And we did give a range for margin. And yes, I tried to be a little conservative. But at the same time, I try not to be overly conservative at the same time. We try to give you a legitimate look at what we think it's going to be.

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Maynard Joseph Um, Macquarie Research - Analyst [20]

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Okay. And sort of just given the auto and market weakness in the fourth quarter and heading into the new year, not looking for anything quantitative but just qualitatively, did that have any impact on your MLCC contract pricing discussions for 2019?

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William M. Lowe, KEMET Corporation - CEO & Director [21]

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Basically, those were all -- our contracts are negotiated typically between October and December, and they go into effect in January. So those contracts for the calendar year have been negotiated. Now what can be impactful is the actual volume that a particular customer actually uses for the year. So you win an award at a particular price, you're allocated a particular share. They tell you what they think the total volume is going to be for the year. And of course, if that volume turns out higher or lower it has an impact on your revenue and your margins because of which direction it goes. But that's -- those have already been negotiated, and they're in place. It's a question now from a volume perspective of what the actual customers need for their own production.

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Maynard Joseph Um, Macquarie Research - Analyst [22]

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Got it. Okay. And then just in terms of 5G, you talked about it more sort of being a 2020 type of phenomenon. But given kind of the tightness in ceramic and tantalum polymer, when should we start to see some of the benefits to you guys? Shouldn't they be sourcing kind of ahead of the infrastructure builds?

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Gregory C. Thompson, KEMET Corporation - Executive VP & CFO [23]

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Yes, we'll see some of this next fiscal year for us. I mean, my comment about fiscal 2020 was that, that was -- that could be the start of another, I'll hesitate to use the word, boom. But for instance, once we -- once 5G is in place, there is a lot of connectivity that needs to be upgraded to be able to use it. It also enables a lot of other things that are being developed today that really need 5G, autonomous vehicles, for instance, to really function the way they need to function. So I was talking about really that could kick off another decade of upgrades, if you will, to existing products that we have today. So we will -- we expect to see an impact as more towards the back half of the fiscal year. We do have awards that we have regarding 5G that we're very pleased about that will generate pretty good revenue. But it starts in the back half of fiscal -- our next fiscal year. And then rolls from full year basis in the fiscal '21. So we're kind of in that -- 5G is in that trial period. And if so there won't be a full rollout of 5G in this calendar year but it will start to have an impact. And for us, it will be more of the back half from a materiality standpoint.

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Maynard Joseph Um, Macquarie Research - Analyst [24]

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Okay. And can you just talk about whether there's been any impact on the government shutdown on your government businesses?

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William M. Lowe, KEMET Corporation - CEO & Director [25]

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From a military standpoint, we really have -- we didn't really see that in -- we saw a little decline in military and medical as a segment. But I'm not seeing that growing into the fourth quarter. I think it's going to be relatively stable.

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Maynard Joseph Um, Macquarie Research - Analyst [26]

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Okay. And then just last for me. Can you just talk about the timing of the restructuring charges for the Granna plan? And how we should think about that impacting the cash flows over the course of the year?

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William M. Lowe, KEMET Corporation - CEO & Director [27]

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It's really over the next 6 months or so. And that cash flow totals aren't that material. It's about -- overall when you get through the whole project, it's about $3.8 million that will start here very soon. So it's first half of the year and it's not a huge number.

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Operator [28]

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

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [29]

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Couple quick follow-ups. Most of my questions have been asked and answered. But just in terms of the guidance in the general, I guess, softness you discussed before, obviously, Asia and then the kind of unexpected rebalancing or correction in the inventory. Are there additional risks that you're kind of looking at that kind of create that softness look -- that you're looking at for the next 6 months or so? Or does it allude to the primary drivers?

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William M. Lowe, KEMET Corporation - CEO & Director [30]

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That's the primary driver we have. There is a little shift in -- and on the consumer segment, again, and, let's say, large screen PCs, or smaller screen PCs, which, for us, means that we sell less polymer. It could be the same number of shipments, for instance, of PCs but less content for us just because there's less content in those. And then our share of the content in the PCs are different as well from large screen to smaller screen. So we're being a bit cautious when it comes to that. The view on that is a bit cloudy, I would say. And so our views could change, and that's why I say, I'm -- we're trying to give you a little bit of flavor for what we might see this next year. But of course, until we finish the fiscal year and rollout through, we'll have a much better view of what next fiscal year looks like as we actually finish the year and we talk to you on our next earnings call.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [31]

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Understood. And last question I have, last quarter, you guys had mentioned the potential to have a total of 3 customers that were providing this -- the cash to build out additional CapEx -- additional capacity. I know, obviously, you've announced 2 of the 3. Just wondering if you can comment on the third one potential?

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William M. Lowe, KEMET Corporation - CEO & Director [32]

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Not other than to say that we're actually still having discussions as to whether that will take place.

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Operator [33]

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(Operator Instructions) And at this time, there are no further audio questions.

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William M. Lowe, KEMET Corporation - CEO & Director [34]

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All right. Well, then thank you. Thank you for everyone for joining us this morning. And we look forward to following up with you on our next call, and you'll know what the next fiscal year will bring. Thank you very much.

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Operator [35]

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And thank you. This concludes today's conference. You may now disconnect.