Q3 2020 Earnings Call
Ladies and gentlemen, thank you for standing by.
Welcome to the cabinets stayed quite groups that school year tiny tiny earnings conference call. At this time, all participate I know listen only mode. I think it's because you might still will be a question answer session.
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Thank you. Please press the pound King please be advised to today's conference is being recorded if you require any further sister. Please press star zero. Thank you I would now like turn the conference over to your host Mr., which at that are now so you may begin.
Thank you Larry.
And good morning, everyone.
Welcome to Chemeds conference call to discuss the financial results for the third quarter fiscal year 2020, which concluded on December 31st 2019.
Joining me on the call is below 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 into financial portion of the presentation.
Before we begin we would like to advise you that all statements addressing expectations or projections about the future.
Our forward looking statements.
Some of these 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-K is or 10-Q's, and our registration filing statement for additional information on those risks and uncertainties.
Now I will turn over to call to Bill.
Thank you Richard and good morning, everyone.
As we monitor the occur.
On a virus developments in China, let me start by saying that the health and safety of our employees their families customers and suppliers is our top priority.
On January 27, as information on the outbreak became more widely publicized.
Impose a travel ban on all of our employees.
On February 28, two in from the countries of China, including Hong Kong.
Japan, Thailand, Vietnam and Indonesia.
This included inbound travel from customers and suppliers as well, we're encouraging video conferencing to take the place a face to face meetings.
As a number of infected individuals has grown exponentially since the beginning of our travel ban we plan to reevaluate the re evaluate this travel ban as we approach into this month and either extended or discontinue it.
We are monitoring <unk> current of ours outbreak closely and if implemented precautionary measures across all of our locations.
In the Asia Pacific.
Following the director from the China's central governments to 2020 holiday period in those areas has been prolong February nine 2020.
Many shipping lanes for goods are currently close an expected to follow the same schedule.
We'll continue to adhere to the guidance from the government as well as global and local.
Health authorities regarding the proper prevention and management of this issue.
We are running our key channel and facility in Suzhou at around 40% capacity by the workforce that has been allowed to stay in place throughout the period. Other workers will be allowed to return to work on February 10.
Because the situation.
Turning to still very fluid it remains unclear as to the impact this will have on our business. However.
Electronics industry in general remain strong and demand continues for our products and.
Any impacts would most likely cause delayed revenue and not lost revenue of course, many if not all of our customers in China are under the same.
Guidelines for returned to work day.
Since in the region is that local service and retail industry is in China will be impacted more.
Again, we're keeping a close eye on the situation.
Now a few words on the progress of the merger agreement.
Right and update.
There's a specialty.
Meeting of stockholders that will be on February Twentyth. There was a proxy that was filed and mailed on January 14, and a supplemental proxy was filed on February 5th.
Regarding the processes for antitrust filings all of the filings have been filed the U.S. the hubs.
Scott Rodino.
Germany, and Austria have been approved.
China, Mexico in Taiwan, ARX remaining outstanding at the moment as well as the surface approval.
Surface approval was was filed on January 3rd and the 45 day period began January 20 Threerd.
We are having ongoing dialogue as expected and we're on course with no unusual events, we're still expecting a closing in the second half of this calendar year. So I'd ask you to please refer to our proxy in our supplemental proxy.
For all the merger details.
Before I give you more color around the state of our business.
And the environment I'll turn the call over to Greg to recap the numbers for the quarter 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 from it.
I will start my review of the numbers on slide three and four of the.
Webcast material.
Revenue for this quarter was down 15.8% to 294.7 million compared to Q3 last year, a 350.2 million and above the midpoint of our earlier guidance.
Revenue was down 10% sequentially.
Leap from 327.4 million in the trailing quarter ended September 30.
The lower revenue level reflect the de stocking which continues in the distribution channel as we work with our distribution partners toward normalized inventory levels.
GAAP net income was 16 point sixmillion.
Or 28 cents per diluted share for this quarter compared to GAAP net income of 40.8 million or 69 cents per diluted share for the quarter ended December 31 2018.
This decline was due to lower revenues for the most part SGN a nonrecurring expenses related to the merger.
Agreement.
Foreign exchange losses from a weaker U.S. dollar compared to the same quarter last year and a higher income tax rate in fiscal year 20.
Our non-GAAP adjusted net income was 27 point sixmillion or 46 cents per diluted share compared to 62 points.
7 million or dollar six per diluted share that third quarter last year.
GAAP gross margin was down compared to last year's third quarter by 300 assert 70 basis points.
35.3% to 31.66% as result of the lower revenue levels.
Non-GAAP gross margin was in line with guidance as it came in at 31.9%.
Our adjusted EBITDA for the quarter was 56.7 million down from the 82 million in the third quarter last year.
On an LTM basis, which you can find on page five adjusted.
EBITDA margin as of this quarter remains strong 22.2% compared to 19.3% in the third quarter of last year.
This is further evidence that the structural changes made over the last few years to our business continued to pay off on the bottom line. Despite.
The current macro economic headwinds.
Non-GAAP income taxes were 11.1 billion at an effective tax rate of 28.7 per cent compared to Q3 last year of 2.7 million at an effective tax rate of 4.1%.
As explained in our last earnings call the lower non-GAAP effective tax rate in the prior year was the result of a valuation allowance on the U.S. and certain Japanese deferred tax assets.
As a result of the significant improvements in our profitability along with our forecast for continued strong profitable.
Ability going forward the company made the decision to release the valuation allowance on these deferred tax assets in Q4 of last year.
Accordingly, the non-GAAP effective tax rate has increased to a more normalized rate. We expect this higher effective tax rate to continue in future quarters.
Both GAAP and non-GAAP results.
Now on page six non-GAAP EPS DNA expenses came in below our forecast at 41.2 million compared to last year's third quarter of 43.8 million.
Well the decline was mainly due to lower incentive compensation.
And benefits accruals as compared to the third quarter last year.
On page seven capital expenditures during the quarter were 30.8 million compared to 36.2 million in the prior quarter.
This coming quarter, we expect to spend then the range of 50 to 60 million for capital.
Jurors.
As we continue our plan capacity expansion.
To support future customer demand and improve our 80 infrastructure around the globe.
We expect capital expenditures, including I.T. and corporate spending for the full year ending March 2020 to be in the 130 to 140.
A million range, excluding approximately 45 to 50 million.
Of customer funded capacity expansion related to the customer capacity agreements.
We previously of disclose these capacity agreements with three separate customers whereby one third of our expanded ceramics capacity once.
Pleaded in fiscal year 21.
We'll be in effect pre sold to these three customers.
Net income inventories decreased 5.1 million this quarter to 263.1 million compared to 268.2 million last quarter.
This the decreases.
Across all of our business groups as we make adjustments to our production levels in order to stay in line with current demand.
We expect our net inventories number to can continue skews me to drop in the fourth quarter.
Cash on hand was 208.4 million as of December 30.
In 2019, an increase of 15.7 million over last quarter ended September Thirtyth 2019.
We had a strong cash flow generation performance this quarter with 31.9 million cash provided by operating activities, which included onetime payments of.
Approximately 11 million.
Related to litigation settlements 5.3 million of nonrecurring expenses related to the merger agreement and another 6.1 million payment of token related anti trust funds.
Our accrual for these token related anti trust fines now stands at 19.
Point 7 million.
Our net debt was 103.3 million at quarter end.
We continue to have a strong balance sheet that provides us significant financial flexibility.
Now now I will turn the call back over to build to comment on the business groups.
Thank you Greg.
So let's take a look at our business groups, starting with the a solid capacitor group.
South capacitors revenue was 34.8 million lower are down 14.6% versus the same quarter last year.
And if you look at the to sell capacitor product lines. The revenue for the ceramic product line decreased seven.
Point 2 million or 7.6% versus the same quarter the previous year trying to make revenue decrease in the distribution channel an increased indirect channels. The OEM any M.S., while regionally Europe in America decreased and Asia showed a positive increase compared to the same quarter a year ago.
The increases were driven by.
Correct mix and a favorable MLC see pricing segments showing growth as compared to the same quarter a year ago include defense and aerospace industrial and medical.
Im auto segment grew in direct channels, when compared to the same quarter a year ago.
Focus for future growth in our ceramic product segments continues to be development.
Designed in and supply of ceramic capacitor is requiring high performance reliability based on more robust designs and materials.
Many of these require larger sizes to handle higher current and voltage or power requirements.
We said that previously we are insulated, but not immune from the.
A market dynamics because of our product focus and business model.
We are forecasting reduced ceramic revenue for the upcoming quarter due to the did the general global market conditions that remained sluggish and specifically demand that is somewhat stagnant or declining in automotive and industrial markets because of terrorists or other global macro economic factors.
We also plan on further reducing ceramics inventory within our distribution network.
This quarter by shipping in lower volumes and our distributor partners will ships to their customers helped balance out the inventory and the channel we saw a progress in the previous quarter, but anticipate further corrections will be necessary.
Given the global market conditions.
We believe this is the right thing to do.
Revenue for our 10 on product line decreased 27.6 million or 19.2% versus the same quarter last year commercial middle two products were down approximately 15 million.
And commercial polymer products were down approximately 14.2 or 15 per.
Percent.
Both products were negatively impacted by a combination of excess inventory into distribution channel and general softness softness in the telecom segment within M.S.
Revenue for our specialty tantalum products increased 1.7 million year over year, driven by strength in the military and medical segments.
Our focus for future growth in our tantalum product remains on new product development and design ins success for applications, requiring higher frequencies harsh environments limited board space and enhanced audio quality.
These application requirements across many in segments, including the tablet or.
You see telecom and cloud computing automotive and industrial.
The solid capacitor business group gross margin decreased to 41.6% or 250 basis points lower than the same quarter last fiscal year, but I have to comment and go up my script for a second to say 41.6%.
As a fantastic gross margin that continues even while we have revenue that declines.
These market impacts were somewhat offset by continued focus on re occurring cost out initiatives that we continue yield improvement and alignment of our manufacturing cost structure was lower volumes.
Looking forward into Q4, the backlog in tantalum is increasing driven by improving inventory picture for our polymer products and distribution and a corresponding strengthening in order rates.
Panel and book to Bill is approximately 1.15 backlog in ceramics as approximately six months with more normalized lead times.
As for all products ceramics book to Bill is approximately <unk> 0.85.
Our film Electrolytics business revenue was 42.9 million, which was 7.3 million lower than the same quarter last fiscal year 2019.
Revenue slowed across distribution and OEM channels during the second quarter across all regions.
Driven by softening automotive market.
Gross margin was 3% compared to 13.5% in the same quarter in fiscal year 2019.
Decreasing volumes in the automotive market and a shift in product mix contributed to the lower margin in the third quarter on a positive side, we're seeing a growing number of opportunity is coming from.
The electrification of vehicles as well as from the increase a worldwide investments into Green energy.
With a strong investments we are putting in R&D, we're very well positioned for future growth and in all those key applications. The investments in R&D also include extension of product offerings on solid on aluminum solid.
Polymer and significant advances on the actual aluminum hybrid polymer technology.
For the magnetic sensors and actuators business group revenue for the quarter came in at 48 million, which was 13 point point 4 million lower in the same quarter in fiscal year 2019.
Gross margin came in at 14.9.
There's a decrease of 430 basis points year over year.
The decrease was mainly driven by lower demand for our HMI flex suppression sheets, primarily related to a slowdown in the smartphone market. We're experiencing a continued slow down and demand for P. EZO actuator products used in semiconductor production equipment.
Consistent with the overall semiconductor market situation as well as specific specific customer related markets. In addition.
We are subject to the global year over year slowdown in the global server market.
On the positive side, we continue to see strength and upward momentum in our metal wire business for the medical catheter Guidewire market.
Additionally, we continue to see nice growth through the distribution channels as we develop and place more new products into the channel to position and grow Emmis, a long tail business, particularly new choke coil series name MEDCOM, which was released to the distribution channel isn't expected to make significant inroads into the.
Market for the foreseeable future I'm very pleased with the pipeline of projects that we haven't place for the future as we expand MSC is region, well beyond Japan and Asia in general.
For the regions Europe close at 61.6 million, which was down 20.8% versus the same quarter last year and.
Fusion Pos came in at 42.7 million, which is a didn't 10% decrease from the previous quarter and a 19.4% decrease same quarter year over year.
Our M.S. OEM business has been almost flat quarter over quarter, driven by the Oems and slightly down year over year the.
Performance has been driven from a large increase in our green energy customer base and by our industrial business, while our automotive business. So unusual year end slowdown.
Our distribution business has seen a steep decline quarter over quarter up 21% and 35% year over year.
Distribution partners.
As well as Pos customers ordering less to correct or high inventories. We assume this trend continues on a lower level for the first half of calendar 20.
In the Americas revenues close 60 64.4 million.
Which was a 19.3% decrease from last quarter and a 29.6% decrease.
From the same quarter last year.
The distribution business continued to soften last quarter was down 10.2% and down 332.2% from a year ago.
We do expect the chance that channel to be down this quarter as inventory correction continues our OEM business was down quarter over quarter, but 20.
5.2% put up 9% versus a year ago.
Dms channel was down 26.2% quarter over quarter and down 33.9% versus year ago. The decrease numbers were driven by excess inventory and reduce requirements for some of our networking customers. We do expect the OEM M.S. business.
In the Americas to flatten out this current quarter and our Pos business was down slightly quarter over quarter, but our expectations are this flatten that this will flatten out this quarter as well.
[noise] Asia closed at 127 million, which was 4.3% decrease from the prior quarter and 4.5% down.
Compared to the same quarter last year Pos came in strong at 60.7 million increased by 2% from the prior quarter and up 12% from the same quarter last year. The market is flattish in Asia. However, we do see signs of recovery in some of this segments as China continues to drive.
See I O T and enterprise storage is.
Booking from the SSD and servers remain positive book to Bill ratio at our distribution channels is increasing steadily while their inventory levels continues to drop.
We're hoping that the trade deals signed between US and China will also help consumer confidence confidences and PMI readings in China.
Hi pipeline is solid and Asia and the team will continue to build a larger customer base with the focus on Pos sales and new design ins.
Our Q3 revenues for Japan, or Korea, close at 42.3 million, which was a decrease of 6.6% versus the prior quarter and a decrease of 13.1 year over year.
Demand for the automotive segment remained low as demand in our consumer segment related to the notebook Pcs and LCD Tvs Alternatively demand for products used in medical remains strong and demand for products used in semiconductor related equipment segment started to improve and this distribution channel Pos.
Reached 3.4 million, an increase of 36% from the previous quarter and year over year.
Regional book to Bill showed significant improvement coming in at 1.13 for the quarter helped by an increase in demand from industrial segment customers.
For our distribution channel Picoway generated.
115 million in revenue down 12% compared to Q2.
POS for the quarter came in at 161 down 1% as compared to Q2 fiscal 20.
This Pos to Peel away alignment drove our inventory in the channel down 3% overall, our book to Bill on an overall basis consolidated.
Just distribution has been increasing slightly over the past few weeks and now stands at 1.06 on a consolidated basis.
Before I turn the call back to Greg and for the forecast only make a comment on the general market with a focus on a couple of segments.
While the second half of 2019.
And had an debt as hasn't badly showed weaker demand for electronics, we remain very confident moving forward overall, we expect electronic content to grow in in 2020 by 2.4% semiconductor sales seem to have hit their lowest level and our slowly yet steadily climbing back up.
Passive.
Components sales are strongly correlated to semiconductor sales, although typically lag behind one or two quarters.
Biggest limitation at the moment remains an overall inventory situation, which we are actively addressing.
Segment Wise military defense, and aerospace will repeat the gains and strong demand.
Man showed last year auto sale units are likely to stay depressed, but the electronic content associated is expected to rebound and grow although slightly.
Perhaps the most exciting trend, we see as a more robust fiveg rollout, which in turn is helping to live smartphone sales.
I would like to remind you that the content of MLC.
Cc and a smartphone is over 1000 pieces per device.
Positive smartphone sales will rapidly consume significant capacity of MLCC capacitors and it does not unlikely to witness tightness in supply chain and the second half of this calendar year.
Lastly, we see significant growth in all server and storage.
Solutions, ranging from solid state drive devices to edge computing hardware units, which is a great fit for our polymer products.
I'd like to just comment on a few of our recent design wins.
At the 2020, Las Vegas, CES, a new 8-K, LCD TV was introduced with sound emission.
Achieved by a tweeter frame vibration technology.
<unk> is all electric acoustic module is an integral part of such design an impressive achievement from our technology group in Japan. We also continue to strengthen our position in the solar inverter market covering with our ceramic products the micro inverters and.
And our film ones.
Higher power range in both cases, we're working close closely with customers, who need kimmitt timely support in order to fulfill their growth projection.
Revenues, resulting from such cooperation are projected to hit 20 million in our fiscal 21 with a consumer customer.
Particular, breaking 10 million in sales up from just 1 million just three years ago.
And the automotive space as I mentioned, we see positive activity. We recently locked in several designs and application ranging from on building onboard Chargers electric compressors as well as as well as level three and four autonomous.
Driving boards.
In this space Kemet can truly show its full product lineup, including our new MPX inductor series, which will be fully automotive grade next month.
In SSD segment, our solid state drive we continue to work with our customers to order in order to establish kemet as the technology market leader.
A recent design win we closed last year is now ramping up and an expected to generate over 10 million in sales started in 2021.
It definitely continues to be an exciting time at Kevin.
I'll now turn the call back to Greg to discuss our outlook.
Thanks, Bill so before talking about.
At our outlook I want to reiterate what bill said about the Corona virus outbreak in our priority being a safety and well being of our employees.
Our customers and our suppliers.
From a business standpoint, it is still too early to gauge the full impact as the situation is still evolving.
Our outlook that I'm about to cover takes into consideration the estimated business disruption for the current extended Chinese new year's holiday, but beyond that we have little visibility and therefore cannot speculate.
On the impact to the business.
All that said, we expect our fourth quarter sales.
As to be in the range of 275 to 288 million down approximately 19% to 23% from last years third quarter and sequentially down 2.3% to 6.7%.
The lower revenue number reflects the continued.
Wing distribution channel correction, which bill discussed.
That said, we believe our gross margin will continue to be relatively strong and reflect the positive impact from our structural changes and we expect non-GAAP gross margin to remain between around 28% and.
30%.
SGN a expenses should be 43 to 45 million and R&D expenses in the range of 12.5% to 13.5 million.
We expect our fourth quarter and full year non-GAAP effective tax rate to be in the range of 29 to three.
33%.
Now I will turn the call back to Bill for some final remarks, thanks, Greg.
Clearly, we need to work through the impact of the criminal virus over the next few months and continue to do our part to control it spread both within China and the world.
We'll be doing as part within our facilities.
These and also keeping our employees as safe as possible around the globe through our internal policies.
We believe the industry itself as an underlying strength that will show resilience to the current disruption. We are now experiencing in China. The uptick that we expect in the coming cycle, driven by Fiveg and the resurgence of new cell phone requirements.
We'll provide opportunities and again create a supply demand squeeze on our large case ceramics.
As small case size produces gobble up their capacity to serve the consumer market demand.
We remain focused to complete our expansion in our ceramic business and we are not slowing down our efforts to be prepared to capture that growth.
Immediately when it presents itself.
Of course, I also wish to thank all of our employees around the globe develop these new technologies that produce or support our quality products that make it all possible.
And especially with the thank our employees that are that have provided assistance to our China locations with a special thanks to our Japanese.
Poisoner Italian purchasing team that have provided thousands of masks to our China locations just recently.
Operator, we're now prepared to take questions.
Thank you at this time I would likely mind boggling why am I get asked the question. Please press Star then the number one.
Telephone keypad warmed up starting from the number one on the power from the top coprocessor from almost the composite came over.
Your first question comes from the line of Craig Hallum Riley. Your line. So your line is now.
Yes, thanks for taking the question and Bill Congratulations on navigating decembers choppy environment, Tim The design wins, you talked about emanating out of CES.
My first question was was really been on.
On the fiscal fourth quarter revenue outlook I'm, hoping you can just give us some.
The incremental positives and negatives as we as we look at trends.
One.
For the inventory.
Reduction that you hope to achieve in the channel how much of the first half inventory reduction would be completed exiting the quarter at the guidance midpoint and and then if.
Our notable comments regarding either channels or products that would be helpful as well.
Yes, let me address it I guess in a couple ways one lets putting aside the impact if there is an impact from.
The China situation and the virus any disruption there on.
On going back to work dates.
You know we started the we started in the quarter in Q4 at about the same pace, we started Q3.
And so inc. encouraged from that perspective that the pace at which we were seeing ordering and potential shipments in what we would say we have on the.
Rock in other words.
Looked to be able to do shipped this quarter would be in the high high end of a range of our of our forecast.
So we see that as we see that as a.
Positive.
The the and at that to your to your question that about the impact.
Inventories in that range.
We would expect to see distribution inventories potentially decline.
Somewhere between eight and $12 million, which is.
As a good drop for us.
Which would leave us with maybe just a little bit for adjustments in June we.
I think to get to what might be a normalized levels. So we're trying to make good.
Decisions about what we're selling in the based upon what is being sold out and still.
If we end up in the mid of the range or in the high mid of the range for the revenue again barring an impact.
Of the of China that that could could disrupt things.
That's where we'd expect inventories to drop and that's our goal so where we think that that would that would reflect only a small as.
As Greg said in his remarks.
At the current level, maybe a 2.7% decline at the high end of the range. So may.
Maybe it's a it's a 3% to 3.5% decline quarter over quarter, which considering all things I think is up pretty minor drop quarter over quarter.
Absent again absent what what goes on the China, we tried to bake in on the lower under our range, but potential impact for.
For.
[noise] port for China, not knowing whether what even if we come back to work on the 10th of everything actually gets out the door.
To our customers because they have the same issue they've got to bring they've got to start work they have to bring back employees, who left for the holiday.
And as we all know in China, not everyone comes back to work.
So there's the.
Irene of folks and that has to happen not just at kemet, but it has to happen.
At our customers as well.
But we're encouraged by what we saw it we will as we rolled into the weeks first week of January we were encouraged by by our booking by the book to Bill.
And by what we were expect where are we going ask.
To ship.
During the quarter.
That's helpful and certainly China, some very dynamic situation right now.
I wanted to use my follow up.
Question for Greg Greg as we look at the gross margin guidance certainly gross margins are hanging in quite well.
Given.
The macro backdrop and the.
Corey production the companies trying to achieve in the quarter ends we look at the sequential change from December to March can you just help us understand how much of that is related to pricing resets that typically take place around this time of year versus just.
The volume impact of what's happening is as you bring inventories down on.
And in the channel and as we work through that situation. There other factors would be helpful to quantify those as well.
Yes, the Craig the a the pricing reset there would be a small amount in there for the for the for our fiscal fiscal fourth fourth quarter, but also.
So as you would know as we adjust on the distribution channel side distribution distribution revenues for us tend to be a little bit higher margin than others. So from a mix perspective, it's not quite as advantageous either.
I'd say there are some other mix mix changes in there as well.
Oh and the reason, we're able to maintain those margins at that level is as we adjust our production capacity and take out take out cost and we continue to have some really meaningful cost reduction projects that that offset some of those some of those negative factors.
On that last point.
Greg is it is impossible to try just with some color on any further opportunities that are that exists through the year or are things that can be done to reduce.
Reduced fixed cost really front end loaded in calendar 20.
Its nothing new from what we have.
I've been doing over the last several years, so it's continuing the tantalum vertical integration.
Initiatives. We've also given the pullback in ceramics demand in particular, we've we've also had to reduce our our labor force there a bit.
And then I would say as we add capacity going forward for ceramics, as we expect that business too to pick up.
We have done we will do that really with really just direct direct labor and the fixed overhead in the variable kind of fixed overhead costs will just get spread over.
More and more volume and so we would expect that that would.
That would be a positive driver to our margins going forward. So again nothing new.
In particular, it's all those initiatives that we continue to execute against like we've been talking about for a few years now.
Thank you and lastly, if I could bill thanks.
We're giving us an update on some of the things that are happening from a regulatory in a process standpoint relative to that.
Argue acquisition. My question is for for those countries, where we're we're awaiting approval us Mexico, Taiwan and China I believe can you give us any update on.
How.
Interaction is going with those entities anything that we should be focused on as it relates to closing out those approvals.
No nothing up so there's nothing outside the ordinary we're having the dialogue that you would expect us to have where we're answering questions and providing information.
So there is nothing unusual that's.
Thats occurring.
They are on pace.
Which were encouraged by that the contacts were all made relatively quickly after the filings and.
We have been providing information they have been asking so nothing unusual nothing to be concerned about.
To date, and we're working through the process.
And we were we believe that the timeline is still the timeline that we put out of our originally is that sometime probably early in the hopefully early in the second half of the calendar year.
We'll be able to wrap it up so that nothing's changed in the timeline at this point.
Great. Thanks for the help.
Okay.
Thank you.
Thank you.
That's great I would like to remind everyone in order to ask a question. Please press Star then the number one I will comment on key talent. We have your next question coming from the line of Marco Rodriguez from Stonegate capital models from Citi. Your line is not alone.
Yeah.
Hi, Good morning, guys. Thank you for attending my questions.
Hi, Marco.
I apologize I had some technical difficulties with my thought was if you covered.
Working capital accounts, let me know and I can I can circle back around to the transcript, but just wondering if you can talk a little bit more about.
On the balance sheet.
Inventory days have been kind of going up pretty steadily here.
Throughout the fiscal year.
Just trying to get a a gauge as far as what maybe those drivers on that what your expectations are is that as according progress here.
Sure So I would say now.
Inventory has started to come down a little bit and and I did mention in my prepared remarks that we expected to come down further in the in the fourth quarter, so, but you're right. It has increased and I'd say throughout the year. It's been three three reasons, probably firstly it's related to the.
Amex business and getting us balanced out.
As the demand there has softened at least through the distribution channel and so we think we're we've got that at equilibrium now and has started to started to come down.
After that the other reason that inventories had.
Increased.
But again coming down is we had some really good buys we thought for tantalum more at at good prices and so we bought short term we bought more than we actually required but it was that really good prices and so we went ahead and and did that and then the other.
To the.
To a.
Lesser extend driver.
He is in film and electrolytic as you'll recall.
We shut down our grant a Sweden business in moved all of that productive capacity and electrolytics down to our Portugal ever ever facility and so.
We we had to build inventories up there in most of that's now now.
Ill now worked off but those those things are all all working through that we would expect some meaningful reduction further reductions to inventory in the fourth quarter.
But probably still more more to go in into fiscal year 20 as well.
That's helpful and then in terms of us thinking about gross margins in the impact of that inventory kind of cycling through as we look into fiscal 21, how should we thinking about that sort of dynamic.
Well, we have put any guidance out and won't until the next quarter for fiscal year 20, but.
I think you can see the.
See the confidence that we have in our general gross margin levels now of so the fourth quarter guidance, 28% to 30%.
And so we've done really team I think has done a phenomenal job in some soft conditions that we've seen now for the second.
Half of the year to keep those margins up at that kind of level by by offsetting some of that softness with meaningful cost reduction projects. The kind of structural changes that we've talked about before and so we would expect more of the more of the same of that.
Going forward, obviously subject to how them how the market.
And some of the growth starts to kick back in.
Okay, and then just lastly, I know this is a.
Difficult question that dynamic situation in China with the virus, maybe if you can just kind of put some additional thoughts on how you guys are thinking about some contingency aspects if if.
The.
Shutdowns extends further into March for example, just sort of what steps are what sort of.
Plans, you might be able to put in place and how long they might be able to take the kind of ship capacity or how you might think it might impact the electronic supply chain.
Yeah, I mean, that's a good.
Question on we have the ability in some cases of course, a shift the shift capacity it doesn't nothing like that can happen necessarily overnight.
And in some cases, we wouldn't be able to shift.
Capacity from one facility to another based on equipment size of the product that we're making large larger case versus.
Smaller case in polymer for instance.
But at the same time and I mentioned this in my in my remarks.
Of course, our customers customers there would be very large portion of what we produced in China of course stays in China.
And our customers will be affected the same way I think the demand the.
And is still there I think it's a matter necessarily have lost revenue.
It's a matter of deferred revenue. So yes, there could be an impact if it was extended long into March.
We're not quantifying what that would be at the moment.
I don't think we're expecting that.
I mean at the moment.
Its February six the current.
Comments from the.
The region and the government is that that February 10th data is still holding.
But yeah, I mean, if that if that were to take place. There are some plans we have to two to addressed.
But.
Again, most of our customers will be facing the same thing I think it's a matter deferral. It would cause disruption is supply chain to be a lot of pent up demand behind the customers.
That that it's a ripple effect of course going from us to our customers to their customers.
The end demand, especially if it's in the consumer segment or if it's in automotive for instance.
It would be a little different so its a.
It's a task that we are looking out to see how we would address it.
At the moment, we ever fingers crossed the February 10th date that they tell US is holding continues to hold.
Hi, Thanks, a lot very helpful. Thank you guys.
Thank you.
The floor and we have your next question coming from the line of Paulina pipe from Barclays. Please proceed.
Okay.
[laughter] and good morning, [laughter], you mentioned the inventory that you have.
Buildup or and I, just wonder lost more than you would be a time scale up already Smith and the 10 coming back into the market for all materials and what do you foresee any increase in process and how that might seem buckets. You later in the yet.
You know it will take.
Several of you know the way our inventory accounting works and I'll, let Greg get into the detail that but.
When we buy or.
Let's say in agents in the December quarter, or even a september quarter that adds to our inventory of course, it takes a while for that pricing.
The work.
Through the the the income statement. So we would expect expect to see benefit of that.
Lower raw material, if you will throughout the course of this next fiscal year.
Oh.
And of course, we also continue into we continue to buy or it's a continuous supply chain.
Regarding that but.
I don't believe that we're going to see any significant price increases on the raw material side and or.
We're not projecting that as Greg that we took advantage of situation, where we get it's lower than we had been buying though we took the opportunity and you. Some cash that we had to do that I know Greg if you.
I want to make a comment about inventory accounting here, but.
Yeah, and I would say with that incremental or that we bought we would expect that to work off in the fourth quarter and so.
There's a lot of tantalum or is that we have that we're able to buy and so we will constantly look at where we think we can get the best the best pricing.
They liberal in so.
That will be dependent on the market demand demand overall, but I wouldn't expect to see a big.
A lot of variability in our raw material costs as we go.
Thank you very much and I'm just one question I Wonder the last Q is just on.
In the of the merger with again perceiving both NGL time scale as it stands now do you expect any delay in U.S. approval, particularly security relate the checks.
For your business.
No. We don't exist were not expecting to delays were still stick into our.
I'm table that closing in the second half of the calendar year.
Regarding the at least the Hart Scott Rodino filing in the United States, that's already been approved.
That timeframe has expired and therefore, it approved as well as Austria.
In Germany.
So we're working through the de filings with the other.
They are jurisdictions there is nothing out of the ordinary that's taking place.
And we're still believe that our timetable we published earlier, which is a closing in the second half of the calendar year as I said is unchanged.
Thank you very much.
Thank you.
Poor.
And again that'd be worn in order to ask a question, we specify than the number one and your telephone keypad.
There are no right, but this time.
They make an okay. If we have no further questions operator them will conclude the call and we appreciate every one who is that on the call. This morning, and asking questions. Thank you very much and we'll talk to you next quarter. Thank you.
Thank you have no one's perfect dissipating discrimination cities conference you may not disconnect handle everything.
Oh.
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