Q2 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the cabinets second quarter fiscal year 2020 earnings conference call. At this time, all participants' lines are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during this.
Question, you will need to press star one under telephone please be advised to today's conference is being recorded if you require any further assistance. Please press star zero I would know like the Honda conference over to your first speaker today Richard Vatinelle. Thank you. Please go ahead Sir.
Thank you Brenda and good morning, everyone. This is Richard Vatinelle, Vice President and Treasurer welcome to Kemets conference call to discuss the financial results for the second quarter fiscal year 2020, which concluded on September Thirtyth 2019.
Joining me today on the call is below Chief Executive Officer, and break Thompson Executive Vice President and Chief Financial Officer.
As a reminder to you. It presentation is available on our website that should help you follow along in the financial portion of the presentation.
Before we begin we would like to advise you that all statements addressing expectations for projections about the future or forward looking statements.
Some of these statements include words, such as expects anticipates estimates believes 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-K is or 10-Q's in a registration filing statements for additional information on the risks and uncertainties.
Now I will turn to call over to Bill.
Thank you Richard and good morning, everyone.
In addition to reporting our core results were also excited to talk this morning about what we believe is a compelling strategy and strategic combination for our shareholders customers business partners and our employees.
Yesterday evening, we announced an agreement to be acquired by you argue a leading global electronic component company headquartered in Taiwan and listed on the Taiwan stock exchange.
All cash transaction valued at 1.8 billion, which includes the assumption of net debt.
Shareholders of Kim will receive $27 and twenties 20 cents per share in cash, which is not subject to a financing contingency.
Yeah, I'll get was similar to come up with a complete product portfolio and capabilities on a global scale, including production and sales facilities in Asia, Europe and the Americas.
Because of chemists and Yagi shows complimentary product offerings, the combined company will be an industry leader.
In the 28 to 32 billion passive components industry and serve as a one stop provider of a robust portfolio polymer tantalum ceramic film and electrolytic capacitors chip resistors circuit protection as well as magnetic sensors and actuators with revenues of approximately $3 billion.
Our board of directors conducted a thorough process in evaluating this transaction with outside advisors over a number of months along with other potential opportunities to enhance value for shareholders.
The board determined entering into this agreement isn't the best interest to the company and our stakeholders.
First and foremost this transaction will deliver the certainty of immediate cash to shareholders at a 30 day trading premium of 26% and then 90 day trading premium of 37%.
It is also a premium a 14% over our 52 week hot.
Second we are confident this transaction will position commit for long term growth as we enter our second 100 years as a company providing quality products and service.
Together with Yagi, Oh, we will have an enhanced global footprint.
Let me better able to partner with longstanding blue chip customers worldwide through a combined 42 manufacturing plants and 14 dedicated R&D centers with an increased presence and attractive high growth segments and applications.
This includes consumer electronics as well as in the high end automotive industrial aerospace telecom and medical sectors.
The all go team has made it clear there Adam reserve amortization amortization for the Kimmitt brand and the quality of our operations in our success in capturing increased worldwide demand for customer design higher margin electronic components and capacitors.
And our talented workforce.
Further jago in Kemet each have a proven track record of completing major cross border acquisitions and believe this transaction will generate enhanced value for customers and shareholders of both companies as well as greater opportunities for employees.
As I stated earlier and is in our joint press release, the transaction is not subject to a financing contingency.
I'll go intends to fund the transaction with a combination of cash on hand and committed financing.
We would expect to close the transaction in the second half of 2020.
Subject to customary closing conditions, which including Kemet shareholder approval and the receipt of required regulatory approvals in various jurisdictions in which we operate.
Until then commit any yagi Oh, we'll continue to operate as independent companies. Following the close of the transaction Kimmitt will become a wholly owned subsidiary of Jago.
This is an incredible opportunity for our company to capitalize our momentum and providing enhanced experience superior service and broader selection of passive component technologies to our customers across the globe. We're excited to take this next step and I'm optimistic as ever about Kemets future.
Now, let me turn the call over to Greg to go through the numbers on the quarter and then I'll come back to with some comments on the markets and our business units. We did have a great quarter meeting all of our goals and seeing less of an impact from the slow down than our competition with historical margins continue into two improve built by our tireless efforts over the years to embed changes in our structure.
Hi, Greg.
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.
I will stop start my review on slide four and five of the wet webcast slides revenue for the second quarter was down 6.3% to 327.4 billion compared to Q2 last year.
349.2 million.
As we continue our efforts to reduce excess inventory in the distribution channels.
GAAP net income was negative 15.3 million or 26 cents per share loss for the quarter.
Compared to GAAP net income of 37.1 million or 63 cents per diluted share for the quarter ended September 32018.
This decline was driven by a one time items relating to litigation settlements.
As detailed in our 8-K filed this morning, the company entered into a settlement agreement with the plaintiffs in the antitrust litigation.
It originally filed on December four 2014 in which Kemet and more than 20 other capacitor manufacturers and subsidiaries are defendants in a purported class action complaint relating to the sale of capacitors in the U.S.
Kemet has reached a settlement agreement subject to court approval and as agreed to pay an aggregate of 62 million to settlement or the class of plaintiffs.
Pursuant to the terms of this settlement agreement Kemet will pay 10 million within 30 calendar days of the date of the settlement agreement and the remaining amount within 12 months.
As part of the settlement agreement the company did not admit to violating any statute or law any liability or any wrongdoing. The company recorded a total charge for litigation settlements of $63 million in the second quarter.
non-GAAP adjusted net income was 30 to 39.3 million in the second quarter versus 50.8 million in the same quarter last year a.
A decrease of 22.6% due to lower revenues and much higher tax rate and that's why 20, which I'll touch on a bit later.
In spite of lower revenues GAAP gross margin was up significantly compared to last year's second quarter by 220 basis points.
From 32.5 million to 34.7 million due to continuing improvements in operational efficiencies in the solid capacitors segment.
GAAP diluted EPS was 26 cents negative compared to 63 cents for the second quarter last year non-GAAP diluted EPS was 66 cents down compared to 86 cents in the second quarter last year.
Again this decline was due to the higher income tax rate in fiscal year 20.
Our adjusted EBITDA for the second quarter was up 3.5% to 75 million from 72.5 million in the same quarter last year.
Now on slide six the LTM adjusted EBITDA margins have steadily increased over the last two fiscal years from 17.4% at September 32018% to 23.1% for the period ending September 32019.
During our first quarter call, we discuss the structural changes that we've made over the last few years in terms of segmenting the ceramics product line to focus on value added applications.
With that design infocus vertically integrating the tantalum business to improve cost and focus on the newer polymer technology and of course acquiring token to expand our offering and strengthened our balance sheet [noise].
This quarter's results continue to highlight that these structural changes make us a different company today than we were several years ago as we demonstrate continuing strong sustainable profitability performance in spite of the slowdown in the electronics industry.
non-GAAP EPS DNA expenses came in below our forecast at 42.2 million or 12.9% of revenue compared to Q2 last year, a 45.3 million or 13%.
non-GAAP income taxes were 18.7 million at an effective tax rate of 32.2% compared to Q2 last year of 2.2 million at an effective tax rate of 4.1%.
[noise] as explained in our last earnings call. The increase in the non-GAAP income tax effective rate is due to the release in Q4 of last year of are you asked net operating loss valuation allowance and partial valuation allowance in Japan.
This is a result of the significant improvements in our profitability.
Along with our forecast for continued strong profitability going forward.
The further increasing the companys effective tax rate this quarter and in our projection for next quarter as a result of lower projected earnings for the year, which changes the mix of earnings by tax jurisdiction and increases the impacts from the permanent differences related to the tax Reform Act provisions.
Turning now to slide seven capital expenditures during the second quarter were 36.3 million compared to 37.1 million in previous quarter.
This coming quarter, we expect to spend in the range of 45 to 55 million for capital expenditures as we continue our planned capacity expansion focused on ceramics, and tantalum polymer to support future customer customer demand.
Along with investments in our IP infrastructure around the globe Globe.
We expect capital expenditures for the full year ending March 2020 to be in the range of 120 to 135 million. Excluding approximately 45 to 50 million of cuff customer funded capacity expansion related to the customer capacity agreements, which we've discussed over the last couple of.
Earnings calls.
Net income inventories increased 12.1 million in the second quarter to 268.2 million compared to the previous quarter of 256.1 million due to higher ceramics work in process to support future demand and some opportunistic raw material purchases in our tantalum product.
Line.
Cash on hand was 192.7 million, our cash balances and accounts receivable D.S. So were negatively impacted by approximately 10 million by top typhoon Mitag, which cause banking closures throughout Taiwan, a few days before quarter end.
We do process, a significant amount of our cash collections in Asia Pacific through our Taiwan subsidiary.
We generated 51.7 million of cash from operating activities during the second quarter.
Turning to slide eight net debt stands at 113 million at quarter end and net debt to LTM EBITDA.
Oh 0.4.
Is on slide eight this slight increase from Q1 net debt to LTM EBITDA of 0.3 is due due mainly to the increase in customer capacity agreement funding between quarters, which gets recorded as data on the balance sheet as well as the lower cash number as I explained earlier.
During the second quarter, we made our semi annual principal payment of approximately 12.7 million on the outstanding token debt and overall, our financial position remains very strong.
Now I will turn the call back over to bill to comment on the business groups.
Thanks, Greg.
So turning to our business groups and starting with solid capacitors saw capacitor revenue was up.
Was what sorry, 1.8 million lower are down 0.8% versus the same quarter last fiscal year. So looking at the to sell capacitor business product lines. The revenue for the ceramic product line actually increased 21.1 million or 24.1% versus the same quarter the previous year.
Ceramic revenue increase in each channel and increase in each region as compared to the same quarter a year ago.
These increases were driven by product mix and a favorable MLCC pricing growth versus the same quarter a year ago was broad based across almost all ceramic segments are focused segments led the growth, which includes automotive industrial defense and aerospace medical and energy.
Our focus for future growth in our ceramic product segment continues to be development designed in and supply of ceramic capacitors, requiring high performance reliability based on more robust designs and materials.
Many of these require larger sizes to handle higher current and voltage and power requirements.
As compared to the global MLC market, our ceramic revenue as remained at a high level as compared to the global MCC market, which has experienced about a 23% reduction from the peak quarter in September 2018 based upon the World Cup reporting.
[noise]. We've said previously that we are insulated, but not immune from the global market dynamics because of our product focus and our business model. However, we are forecasting reduced ceramic revenue for the upcoming quarter due to general global market conditions that remained sluggish and specifically demand that is somewhat stagnant a decline in the automotive industry.
I will markets because of tariffs and other global market economic factors.
We also plan, reducing ceramics inventory within our distribution network this quarter by shipping and lower volumes than our distribution partners will ship to their customers to help balance out the inventory in the channel.
Given the global market conditions. We believe this was the right thing to do.
Lastly, the December quarter, as a seasonally low quarter for automotive and historically, we typically observe a reduction in the December quarter of 6% to 10% related to automotive except in years, where demand might be accelerating.
Revenue for the tantalum product line decreased 22.9 million or 15.5% versus the same quarter last fiscal year.
CLI and revenue was driven primarily by weakness in the distribution and OEM channels for our legacy imminent two products with eminent to declining approximately.
15.7 million.
Or 50% Paula revenue declined only 8 million or about 8% impacted primarily by the distribution channel and telecom segment softness softness in SMS.
Revenue for our specialty tantalum products increased slightly almost about a million dollars year over year, driven by the strength in the military and medical segments.
Our focus for future growth in the tantalum product segment remains on new product development in design and success for applications, requiring higher frequency harsh environments limited board space and enhanced audio quality.
These application requirements across many in segments, including tablet PC.
Telecom automotive industrial and cloud.
SCB, yes, the solid capacitor business group gross margin increased to 44.4% or 420 basis points higher versus the same quarter last fiscal year.
This improvement was driven by product mix optimization favorable pricing for animal Ccs and favorable manufacturing performance. As result of continued focus on recording recurring cost out initiatives yield improvement and alignment of our manufacturing cost structure with lower volumes.
Backlog and tantalum is stable with normalized lead times backlog and ceramics is approximately seven months with more normalized lead times for lower CV products, but still constrained in many high CV large case sizes, we continue to add capacity to support this demand.
Okay.
Our film and electrolytic business revenue was 41.8 million.
That's 8.8 million lower than the same quarter in fiscal 2019.
Revenue slowed across distribution and OEM channels during the second quarter, mostly in the event.
Which is Europe , and APAC regions, driven by softening automotive market gross margin was 5% compared to 12.4% in the same quarter in the fiscal year 2019.
Decreasing volumes in the automotive market and a shift in product mix contributed to the lower margin in the second quarter.
For magnetic sensors and actuators group revenue for the quarter came in at 52 million, which was 11.2 million lower than the same quarter in fiscal 2019.
Gross margin came in at 14.9%, which was a decrease of 530 basis points year over year.
The decrease was mainly driven by lower demand for.
Flex suppression sheets, primarily related to a slowdown in the smartphone market.
We are experiencing a continued slow down in demand for periods of actuator products used in the semiconductor production equipment.
Consistent with the overall semiconductor market situation as well as specific consumer related markets. In addition, we are subject to the year over year slowdown on the global server market on the positive side, we continue to see strength and upward momentum and our middle wire business for the medical catheter Guidewire market. Additionally, we can send continue to see.
Nice growth as well through the distribution channels, we developed in place more new products and the channel to position and grower MSC long tail business, particularly phase one and two of our new choke oil series, which was recently released through the distribution channel and is expected to expand the business for this for the seeable future I'm pleased with the pipeline a pro.
Next we have in place for the future periods as we expand MSC is reach well beyond Japan.
Looking at the channel now for the distribution channel Picoway generated about 131 million in revenue, which was down 12% compared to first quarter 2020.
POS for the quarter came in at a 163 million, which was essentially flat.
To the prior quarter and this Pos to Peel realignment drove the channel inventory down just slightly.
Before I turn the call back to Greg for our upcoming forecast, let me comment on what we see in the various market segments.
We forecast global light vehicle sales to con contract approximately 5% to 6% year on year, but we continue to see increases in content the electronic components.
We are forecasting moderate growth in this segment for this year and we remain convinced that the content and automotive and mobility in general will continue to grow our backlog and channel sales Pos both reflect this with positive trends year on year.
Demand in the industrial segment has also been impacted by the general slowdown and major you can economies, but we're still seeing pockets of growth driven by the accelerated investment and enhancements and factory and warehouse automation.
And our direct and POS sales for this segment for the quarter decreased in the low single digits year on year.
Our business in the defense and aerospace markets continue to be robust as demonstrated by another quarter of growth in both our direct and distribution channels and we forecast this growth to continue into next year.
In the Telecom segment, we continue to observe soft conditions in legacy solutions and applications and a gradual ramp up and infrastructure and applications that support Fiveg rollout.
We remain focused on the design and efforts as we expand our product offering into Fiveg solutions across all of our product groups.
And the computing segment, which for US includes devices that support cloud solutions as well as personal computing.
We believe we've seen the bottom of the cycle.
See encouraging signs in the traditional service space as well as design wins with customers developing servers were edge computing and enterprise level solid state drives.
Demand in the mature notebook and desktop PC market has improved year on year. We anticipate this to continue into next year.
On our last earnings call I'll share with you the introduction of Metcom and metal composite power inductor line of products. This quarter, we announced the expansion of our Casey linked capacitor series with industry, leading offerings for fast switching wideband gap semiconductor applications, which are forecasted to grow significantly over the new.
Just a few years.
Our Casey linked components will allow designers to increase power efficiency and density in applications, such as Fiveg telecommunication base stations and onboard electric vehicles now I'll turn the call back to Greg to discuss our outlook.
Thank you Bill.
Our outlook, we expect our third quarter sales to be in the range of 285 to 300 million down approximately 8% to 13% from the quarter ended September 32019.
The lower revenue number reflects the distribution channel impact, which bill discussed earlier.
That said, we believe our gross margin will continue to be strong and reflect the positive impact from our structural changes as we expect non-GAAP gross margin to remain between 30% and 32.5%.
S. DNA expenses should be 43 to 45 million and R&D expenses in the range of 12.5 to 13.5 million.
Our global effective tax rate is expected to be around 35% to 39% for the third quarter.
Now I will turn this back to bill for some closing comments.
Thank you Greg as noted by Gregs forecast, we expect to continue to maintain our margins at historical levels and while we're not immune to the slow down as I said earlier.
In some of those end markets and the inventory the distribution channel our expectation is to continue to perform better than our competition on both the top line results as well as margins.
As I said in my opening remarks by combining with Yagi Corporation Kemet is set to begin another exciting 100 years and our journey to make the world a better safer and more connected place to live.
I believe our commitment to innovation and serving customers around the globe is profoundly unique.
A unique culture. This company will endure and along with the quality of our products will continue to make us a leading supplier of electronic components.
Yesterday's announcement is an important acknowledgment of how the services and products, we provide sustain international demand of technological excellence.
Now, we'll open up the call for questions.
As a reminder to ask a question you will need to press star one on your telephone withdraw your question press the pound Keith Please stand by all the compiled that you any roster.
[noise]. Your first question comes from Craig Ellis from B. Riley FBR. Your line is now.
Thanks for taking the question gentlemen, congratulations both Don.
Matt Smith, with Yagi, Oh, and the strong financial results in the quarter.
I wanted to start up just by following up on one of the comments you made in the prepared remarks around.
The gear transaction in some of the other things that the executive team and port, but that I think you said that you looked at other opportunities beyond gear transaction can you provide more color on what those were and why you ultimately decided to to move toward geography.
What we can say today is that I can repeat what I said with the board did go through a thorough process of course with outside advisors for.
Number of months.
And of course that.
Included multiple advisors in fairness opinions et cetera.
All that will be all the steps that the board went through will be in our a proxy statement that when we file preliminary proxy statement that will be filed.
Probably early January .
That's required as a part of that proxy process. So.
We'll lay all that out.
And that would be very clear what the full process was that the board went through over a number of months I will say.
To come to this conclusion.
Great and then as a follow up just on the approval point related to the IDR transaction can you identify which major geographies require approval and in particular, thank my clients will be interested and whether China is needed or not so if you can speak to that you're not yet China will be needed. We are both were both enjoy.
China.
We will be in.
It's a number of locations Craig.
That probably about probably around four four locations in China it'd be about my guess, yes, as well as in the U.S. you would expect to Cvs approval is also required thats correct.
Sure and then moving on just to the financial guidance.
What I want to give us understand.
And then the revenue range that you provided the 385 to 300 million.
How much impact is there.
Distribution inventory reduction.
Versus the quarter that must just reported.
How long would you expect distribution inventory reduction to play out do you think you get it all behind you in this current quarter or is this going to be a multi quarter effort to get inventory to the target level.
So Craig Craig It's a it's to 85 to 300 is our revenue guidance I thought you said, maybe I Couldnt Didnt understand your first your first number and I would say the majority of that.
That decline is related to.
Is related to the distribution inventory impact it came down there was a slight decline as bill mentioned.
But not not as much as we think is required.
Also geographically in Europe , we see some overall slowed down and automotive while we've seen content increases that that is.
Is some slow slowness that we see.
Relative to your specific question about the timing.
I think it's too early to tell but we.
Feels to us like it's probably more like a couple of quarters not just this quarter that we would see slowness, but.
But we'll see how at all develops this quarter and and hopefully get.
Get the the distribution inventories down to.
A healthy level, where we would like to see recognizing we made some impact on that in this quarter, but not as much as we think is needed given what we see for the end demand right now.
I'm going to circle back to previous question I believe I don't have it in front of your but I believe that 8-K.
It was filed this morning that has the list of countries that will that we need approval for so I was actually to check the eight cases that have been filed for this morning. It has been file.
Yes, thanks for that and then Greg a follow up and on the.
Once we provided.
She looked at the trailing five quarter revenue range and issue look at the signals that you're getting from your customers acknowledging that theres meaningful inventory reduction.
Going on in the current quarter and potentially for another quarter of two where do you think the natural level of underlying demand or consumption as for your products where.
Trailing five quarter range, which you peg underlying consumption intense.
Oh.
So tough winter <unk> you know, there's a lot of puts and takes in there I think we've seen a lot of a lot of interest with our new products.
Pricing has been very stable throughout that.
Throughout that period.
I think the guidance that we are looking at that we've given you for the second quarter.
You know, we would we would hope with all those movements in pricing in some volume increases along with the additional volume we have coming on.
We should be looking up we should be looking up from there, but as I said earlier it remains to be seen how this will all play out through the distribution channel and how much progress will make in our into third quarter relating to hit.
I think we'll still see corrections happening in our fourth fiscal quarter in the distribution channel I don't think we're going to be any substantially different than.
Than what you might have heard the rest of the industry is probably the beginning of our fiscal year in April before Weve, but where I think it's probably settle down a bit.
That's fair and then guys lastly from me before I hop in the Q.
Keeping gross margin or the historically high levels. So congratulations on all the structural gains.
If we have a multi quarter period of inventory production is it possible to sustain these levels or how do we assess the gives and takes what things you can do on the continuous improvement cost reduction side versus some of the volume headwinds that are out there.
You know the again one of the things that we've done a really kind of embedded in the margin the yield improvements and while we may have less revenue here there as a result of slowdown or a distribution channel correction those structural changes are embedded in the in the in the margins, that's what's helping to keep them up and we continue course of the business groups continue.
You know to look for ways to to improve margin so our expectation as a stake in that range.
For the margins, even as even as we're seeing corrections and channel over the next couple of quarters.
Congratulations on that and again on the transaction good luck guys.
Thanks, Greg.
Your next question comes from Matt Sheerin from Stifel. Your line is now open.
Yes, Thank you and good morning, guys.
So I just wanted to go back to the transaction and.
The acquisition.
Particularly on valuation if you look at the valuation even with the numbers scrubbed here.
Taking a step down due to the correction.
As everyone else has seen you're still looking at sort of six and a half seven times EBITDA.
In given given the fact that you really transformed the company set it up.
Much better positioned than past cycles, particularly with the product mix the supply chain integration and the balance sheet.
Just wondering why the board felt that that was sort of a fair valuation at at this juncture given that we're basically sort of the bottom of the cycle.
Well, Matt Unfortunately have to go back and repeat a little bit what I said earlier on the first questions because we all they all the detail.
That the board has gone through over.
Quite a number of months.
We'll be all laid out.
In the.
In the proxy statement that we filed right probably right. After the first of the year and I'd be unfair to try to.
Pick and choose various comments.
It would related to the full process at the board went through here and I think it I think I would say wait until that comes out and I think than unusual you along with everyone else level full picture of everything that the board did over the course of a number of months.
To reach this conclusion.
Fair enough what could you tell us where there is this something that the board initiated or you had some interest some outsiders and then you and then you got into sort of a full.
Mode of vetting.
Other suitors is that how that happened just trying to figure out a timing you have that at that is correct. We were we were approached.
Earlier this calendar year.
And then as you know as a result of that.
When that occurs the board under their fiduciary responsibilities are basically required to startup process, which the board did.
So yes, we were approached we did not actively go out seeking.
Okay fair enough in and then just on the tender the regulatory issues, particularly your exposure to military aerospace some of the industrial markets.
Have you vetted died.
Just to make sure that there aren't any any specific challenges or hurdles that you might have to overcome.
We as Greg mentioned, we do have to file precipitous approval, we're not expecting that to be a particular issue, but we do have to file for that approval that that could take six seven months to to get that through.
We do we do.
Okay.
One time are there other will have various components that are considered to be tar related but not on a consistent basis. So it's not a it shouldn't be a major material issue to deal with so that filing will occur our expectations are that we will work through that.
And Matt as you might imagine we have a number of advisors that have helped us assess all that who deal with these kind of issues all the time and all those kinds of things that you've mentioned and other similar to it had been looked at looked at very very very closely.
I'm sure and on the you said that the deal is expected to close in the second half of 20 is that your fiscal 20 or calendar 20.
Calendar 20 calendar, Tony Okay, and then lastly, the very curious.
Got it will dictate that right. Okay understood and then you talked about the that the on the capacitors Ivy.
Tantalum versus ceramic could you give us the percentage breakdown ceramic versus tantalum.
And the revenue.
Yes.
Hang on.
So for the second quarter Tantalum was in this is on the web slides I believe yet tantalum is 38% revenues total revenues and ceramics was 33%.
Total revenues.
MSC was for the others Emmis, a 16% F. any was 13%.
Okay, Okay, alright, well, thank you very much.
Thank you Matt Thanks, Mike.
Next question comes from Marco Rodriguez from Stonegate Capital. Your line is now open.
Good morning, guys. Thank you for taking my questions.
Hey.
Good morning, just wanted to kind of follow up just a little bit here on the acquisition, maybe you can talk a little bit more about sifis approval. When when do you expect too tough to file that and submission if you will.
I believe it's relatively soon I can't give you a specific day, but I think thats one of the first filings that will probably occur over the next 60 days.
And then it will be as it said that the process there could take six to seven months.
Just as a part of that process, but I think thats one of the first ones that gets filed fairly fairly quickly.
Gotcha, and then can you maybe talk a little bit about the ER. The approval you will need in China for this transaction.
Well, it's a standard you know antitrust filing we both do business there. They have if they have facilities or we have facilities. There again, just broadly not just us isolate China, but broadly we're not expecting any particular.
Issues in any particular jurisdiction I think we just have to work through the timing of the regulatory approvals of the various countries.
To get the process through.
Got it and then in terms of the.
The charge taken here for the the legal settlement.
On the any trust can you, maybe just kind of walk a little bit through that Doug. It's a fairly large dollar figure I think that might be one of the higher ones compared to what you've you've done in the past in regard to the any trust.
It is it is well in total.
Of course overtime.
Token accrual for.
And I trust liabilities was substantially higher than that well over 107 million, but 110 million I think so on an but on your on an individual basis you'd be correct that that is one of the the higher ones I can't really comment on on any more than what we've said in our formal comments about the about that settled.
Alan.
Other than the fact that is just to repeat as Greg said that from a payment perspective free cash flow perspective.
We'll be paying 10 million fairly soon here in the next 30 days.
The balance of it to be paid within 12 months, most likely towards end of the 12 months.
For the remaining 52 million.
Got it and is that remaining 52 is that inside of a accrued expenses on the balance sheet or someplace else.
We'll now be inside accrued expenses as of this quarter it will be inside the accrued liabilities.
Gotcha.
And then just coming turning to the overall business itself and and the movements I was wondering maybe you could comment a little bit about what you've seen thus far this quarter I'm, just as far as cadences of demand for product and things of that nature.
From a general perspective.
Well I think you know and Gregs outlook, when we talked about the quarter with a you know well we're pulling back some of the was that the princeridge quarter over quarter our sequentially.
Our sales will be down less than what we're seeing and hearing and so some of our competitors and others in the industry, but it's still it's still a it's still part of that as the inventory correction distribution.
Related not just us not just to some of those smaller case ceramics, but.
In the immuno two product, which fortunately for US one of the reasons that I think our slowdowns a little bit less is that we are predominantly revenue and tantalum predominantly today is coming from Palmer not the middle two product. So you know about 70% or so of our or more of our revenue today on a quarterly basis as Paul.
Them or not immuno too.
That helps us some but there is there as a general slowdown as well that's affecting some of the Palmer.
So.
So it's a it's a mix of that and I'd say, it's both we see some of that in the.
In the smaller case size some of this for US I mean, we do nothing but large case size, but our smaller of the large case.
You know is.
As I got normal lead times today, a little more pricing pressure. There then that has been in the past because of the the.
The slowdown in the smartphone market, which gives the.
The other manufacturers of small case.
Ceramics and opportunity to continue to spread out a bit because they've got the capacity to do that so that's just you put all that together and we're seeing that eight that I think the forecast was 8% to 13% down on on revenue sequentially, which again from an industry standpoint as is on the low end of.
Of revenue a change quarter to quarter.
Got it and last question here.
On the automotive side of the business.
The end market. There for you guys. I was just wondering if maybe you might be able to share any sort of comment said.
You may have had with with customers are your partners. Obviously, you guys have made it.
Well known that the content aspects are are increasing would you definitely benefit you guys over the long run, but just wondering what sort of comments and what sort of things you've been hearing as far as that overall market that demand.
Outlook for like maybe the next six to 12 months.
Well I think in my formal remarks, I think we are thinking it's going to.
All the data, we see as well as comments from to your point from our customers points to kind of a 5% to 6% decline in and volume our unit volume.
The automotive sector at the moment.
It's for US, it's somewhat offset by.
Additional content.
But not a 100% offset by content at this point. So there is theres little mitigating factor of additional content, but we think it's a five at the moment. It appears like it looks like 5% to 6% unit volume decrease year over year as what we're we're.
We're seeing and also hearing at the same time.
Right and so is that general comment around just next quarter or is that sort of a sustained level Oh, we think thats, we see that we'd at the moment, that's kind of over the next six to nine months from a natural in automotive sector standpoint.
Got it understood. Thanks, guys I appreciate the time.
Thank you thanks Mark.
Your next question comes from John Lopez from vertical group. Your line is now open.
Hi, Thanks, so much.
I've a couple of quick ones on your ceramics business, if you don't mind.
One is could could you just parse the calendar third quarter. The first time your ceramics businesses declined in I don't know to have three years measured quarter to quarter.
So just parse out that decline in units versus prices.
[noise].
It would be primarily so our pricing is a is holding holding firm now we do have in terms of overall prices. There is some mix mix difference. So as we as we continue to work down the distribution channel distribution tends to be higher prices and then OEM and.
And he had a mess so that that that is that component of it with the largest would be would be volume volume adjustments, yes, mostly in us and not in the high not any we're still somewhat maxed out on our high CV.
A large case ceramics, when bill looking for the getting some equipment in that will free up some additional capacity up based on our expansion.
So where we're seeing the softness is on the smaller for US are what we will consider smaller case size for us.
In the commercial and the commercial chip side, we're still running.
Barely goal.
But we're not just fairly full running full on the high CV side with longer lead time still with lead times eight to 30 weeks, depending on the particular die electric or.
Okay size, and hi, CV and fairly normal normal lead times eight to 14 weeks on the local TV, so low CV commercial chips.
That's where we're seeing a lot of a lot of the softness.
Gotcha and sorry, just on that topic can you remind me my recollection is that automotive comprises a pretty sizable portion of your ceramics business is that still the case can you just gave the ballpark on kind of what auto as a percent to produce various businesses I think we easily dance around 65% somewhere in that range.
And.
Have you given the rough split just distribution versus OEM with your ceramic business.
We don't really it's a it's probably pretty close to what.
The rest of the businesses our overall.
Distribution channel splits or it was right around 40% number.
Got you know when it goes it varies quarter to quarter, but it wont be substantially different within ceramics.
Gotcha, and sorry, just thinking about that same dynamic between your calendar third quarter and your calendar fourth I know you haven't giving explicit guidance between the two segments, but if we assume kind of that.
An average decline relative to your total guidance in ceramics is that more of the same like mostly units or is there some pricing that's coming into the December quarter.
You know the I'm going out there about the pricing and without giving specific dollar.
Comments is that.
We typically negotiate our OEM contracts.
In the fourth calendar quarter, so in the quarter that we're in we're in the process of doing those negotiations and those prices go into effect for OEM in somewhere in that first calendar quarter of next year not not necessarily January onest, some do but basically within within that quarter.
So we're in the we're in the process of the game negotiations now so I'm not really going up.
On a where pricing will go up calendar year versus calendar year, but that's in process.
You know again the high CV product is still in very high demand and we are still tapped out on that at the moment, while we're trying to get worked with money into to expand that so.
That's different than the commercial chip.
For the sell the smartphones et cetera, we don't.
If you recall, we don't sell into the.
Smartphone market and Kevin.
Sure No that's why I, that's all the Super helpful and I apologize I'm not asking for sort of how the negotiations are going I guess my question was just as you think about the trends in the December quarter relative to September it sounded like September was mostly units not much pricing.
Richard sequentially is it sort of that same mix into the December quarter.
Yes, I think it's probably the same I think we're looking at the same type of X. Yeah, I don't think the mix will be substantially different.
Okay I'm sorry, just two more quick wins just at a high level you referenced this tightness in high CV.
[noise] multiple times and it's been a trend.
At the same time.
My understanding is I see these generally and automotive not not as a rule, but theres more sort of high cap high CV and automotive than other places and if you look at some of your international peers. There are some new factories that are coming online excuse me.
Late this year early next that appear to be sort of automotive focused and so I. Suppose my question for you here is how comfortable are you with the supply demand situation in high CV as you look out over say 12 to 18 months.
I think you know we are I guess, the fact that we're not slowing our expansion down should be a signal that says we still expected to be very.
Very robust in the high CV, Mark, especially in automotive.
And you're right. There is some other capacity coming on Theres also capacity coming off.
The the competitors who announced.
Thats been a year and a half ago now that they were going to.
Go end of life on a number of products are still actively doing that and just they've slowed the process down.
Only because this is Doug my comment I don't know what there.
Don't sit in the room, so I don't know what they're actually doing leisure.
They are there they're running they want to if I was me I'd be running wanting to run my factory as full as I cannot think so therefore as a small case size has pulled back because of the smartphone market, they're continuing to run more large case sizes, rather than extract themselves as quick as they said they would originally so our expectation is and they continue to say.
To the customers that they're going to go end of life on those products and so there are still products that will be pulled out of the market our components pulled out of the market by those competitors that we'll we'll have some of them, we'll have to fill that need the needs not going away. So we we see that dynamic is something that's unusual.
That's in addition to whatever the market trends are with the needs for the for the automotive segment. So that's that's what we're looking at the moment.
Gotcha.
Very helpful.
My last question for you here I apologize if I just kind of get your ceramics business now you're like $100 million give or take.
As you right now is on their ceramics business like $100 million give or take.
You guys actually appear like you have some relatively.
Relevant I guess is already turned their crossover at least like end market wise and I know you're in markets blitzer across all your businesses. But this was my question is as you look across those two businesses on the ceramic side is there a significant amount of crossover.
And if so kind of how what's the plan to sort of handle that.
Well first of all we are competitors and of course. This is day one we just announced the transaction I think sure I'm sure I'm sure that there'll be more commentary coming from from Yagi O is as a as the as the time progressive but I'm not going to comment on that today on day, one of the on day one of the announcement.
No that makes sense. Thank you so much for all the questions I really appreciate it.
Thank you.
I didn't ask a question. Please press Star then the number one on your telephone keypad.
Okay. If there's no other questions operator that I think we can.
We can close the call and thank everyone for their tennis this morning and.
We look forward to discussing further with you on our next earnings call in next year.
Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.