Q1 2020 Earnings Call
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Good morning, Maverick Conference I'd number.
It is 51458 to nine.
Thank you Matt the spelling of your first and last name. Please.
Our statements Michael Am I see H.A. email last name Bitch via CH.
Thank you your company name please.
Yes.
Era spilt.
All right.
Hi E a.
Correct.
<unk> your phone number sir.
Evan a one nine to seven eight to nine sites.
Inky conference in progress I was hoping you know.
Good.
Cash on hand was $217.3 million during the quarter, we paid $12.1 million for token acquired antitrust related fines and legal fees and we also paid approximately $27 million for our annual incentive bonus plans and yet we still generated 33.7 million of cash from operating activities during the quarter.
Of the approximately $110 million of total antitrust fines.
Since the token acquisition in fiscal 2018, we're now down to $26 million left to pay and this is all obviously fully accrued in our books.
So this strong operating cash performance for the quarter is further evidence of the cash flow generating potential of our business.
Turning to slide eight net debt stands at 94.8 million at quarter end and net debt to EBITDA is 0.3.
Our low debt level combined with the very low cost financing of our debt provides us a strong financial position.
The cash generating performance as well as our under Levered balance sheet provides us with significant opportunities to execute on our long term strategies and at the same time also provides the ability to return capital to our shareholders.
Now I will turn the call back over to bill to comment on the business groups.
Thanks, Greg now turning to the groups as Greg said solid capacitors revenue was 34.4 million higher or up 16.1% versus the same quarter last fiscal year.
And look into the two separate solid capacitor business grew product lines.
Revenue for our ceramic product line increased 45.7% or $36.3 million versus the same quarter the previous year.
The ceramic revenue increase.
Increase in each channel and increase in each region as compared to the previous quarter and versus the same quarter a year ago.
These increases were driven by product mix pricing and volume from capacity expansion.
Growth versus the same quarter, a year ago was broad based across all ceramic focused segments.
Growth versus the last quarter was driven by larger case sizes and higher capacitance MLC sees our focus segments led the growth, including energy and the energy defense and aerospace industrial and medical while the automotive segment remained relatively stable at a high historic level.
Revenue for our polymer tantalum product line decreased $1.9 million versus the same quarter last fiscal year.
The decline in revenue was driven primarily by the weakness in distribution in the OEM channels for our legacy immuno two products with immuno to declining approximately $12.1 million, but polymer and specialty products, increasing $10.2 million for the same period.
Driven by the continued design and success and applications involving higher frequencies harsh environments limited board space and enhanced audio requirements in the tablet PC telecom cloud and automotive segments.
Revenue for our specialty tandem products also increased quarter over quarter and year over year, driven by the strength in the military and medical segments.
Our focus for future growth remains in polymer tantalum and aluminum aluminum tantalum products.
Solid capacitor business group gross margin increased to 45.1% or 790 basis points higher versus the same quarter last fiscal year. This improvement was driven by increased revenue from capacity expansion product mix optimization.
Favorable pricing for MLC season favorable manufacturing performance as a result of the continuing focus on recurring cost out initiatives and yield improvements.
And adjusted our direct manufacturing costs, and our immuno two product line.
Backlog in both polymer tantalum and ceramics remains very strong with lead times normalized in polymer, but still constrained in many ceramic high CV and large case sizes.
Our film and electrolytic business revenue was $46.7 million or $8.2 million lower than the same quarter in fiscal 2019.
Revenue slowed across all channels during the first quarter, mostly in the APAC and EMEA regions, driven by softening automotive market gross margin was 6.1% compared to 6.2% 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 first quarter. The recently announced closing of the grant a manufacturing facility in Sweden has been completed.
According to plan and with expected gross margin improvements to come in the future quarters.
For the magnetic sensors and actuators group revenue for the quarter came in at $50.3 million and was $8.5 million lower than the same quarter in fiscal 2019.
Gross margin came in at 13.5% a decrease of 650 basis points from the same quarter in the prior fiscal year.
The decrease was mainly driven by lower demand for our led our flex suppression sheets, primarily related to a slowdown in the smartphone market.
We are experiencing a continued slowdown in demand for Piazza actuator products used in the semiconductor production equipment and specific consumer related markets. In addition, we are subject to the global year over year slowdown in the server market.
On the positive side, we continue to see strength in an upward trend in our metal metal wire business for the medical catheter Guidewire market. Additionally, we continue to see growth in the distribution channel as we develop new products and place more products in the channel to position and grow our MSA long tail business.
Im very excited about the pipeline of projects, we have for future periods as we expand MSR is reach beyond Japan.
A repositioning of their quality products outside of Japan will grow the top line of this business as well as increased gross margin.
To our targeted levels.
Now to the regions Europe closed at $81.7 million up 9.5% compared to the same quarter last year, we continue to see stable business with our Oems with positive outlook for the full year, while at the same time, we see more significant correction coming from our distribution partners.
In the Americas revenues closed at $93.4 million, an impressive 29.4% increase compared to the same quarter last year.
Similar to Europe , we anticipate our distribution business has softened this quarter due to increased amount of inventory, while our OEM business should remain stable to slightly up.
Asia closed at $127.8 million.
A 3.9% decrease compared to the same quarter last year consumer confidence level is still low in China amid the trade dispute the U.S. and the manufacturing PMI ratings have been declining since March.
As the supply chain stabilized and lead times shortened our district.
Distribution partners are continuing to correct the inventory and we believe it will take at least another two quarters to complete this is primarily affecting us in the immuno two product as I mentioned earlier.
Q1 revenues for our fourth and smaller region, Japan, and Korea closed at 42.4 million, which was a decrease of 11.4% compared to the same quarter last year.
Now I'd like to close the regional update with a couple of general comments about distribution on a global basis.
Turns are healthy and some of our product lines and turns were also healthy at several of our top distributors in all regions, having said that there is excess inventory in the distribution channel that will correct itself over the next couple of quarters.
We are managing managing it and working to balance those distributors that still need more product, where the statistics indicate they have a need.
In the immuno to space, where we have where we have seen and we'll see the most impact this year.
We move to get ahead of the curve a few months ago by adjusting our direct labor manufacturing cost by reducing manpower and those plants to maintain our margins evident in the reported margin this quarter.
Our OEM book to Bill is essentially flat at 1.0, and our distribution channel is it 0.71.
Before I turn the call back to Gregg for our forecasts, let me offer some commentary on our industry sectors and our pipeline of new products.
A softening macro economic environment has triggered a slowdown on the automotive segment in all regions with significant contractions virtually in every market.
We forecast global light vehicle sales to slow down in fact contract over approximately 6% year on year in the long run electronic components, though that the content in automotive will continue to grow.
In the automotive segment.
We continue to make significant cross selling progress with our magnetic product line from the MSC business group.
Magnetic filters are being quickly adopted by our major and largest OEM customers in particular out of Europe with programs planned to start in 2020 ramping in 2021 and lasting for several years.
In addition to that we recently announced the introduction of Metcom, our metal composite power inductor line, which will be fully AC Q2 hundred qualified for automotive applications. This product, which will be part of our M&A business group.
This is perhaps the most biggest and most exciting product launch coming has done since the acquisition of token and it will underlines the synergies between the two companies the usage of automotive grade inductors has been it's experiencing significant growth over the last few years and is expected to continue driving but be driven by the electrification of the transportation industry.
With the MEDCOM line Kemet is well positioned to generate incremental revenues leveraging our current go to market strategy.
Customer base and distribution channel.
Our material science expertise on ferrite material. We'll also allows US stay ahead of the technology roadmap. Our goal is to be recognized in this space is a leading brand for the years ahead.
We see mixed signals in the industrial segment, where we remain optimistic about the outlook for this year.
Trade disputes have introduced downward pressures, but stimulus in China and economic policy and other major economies are positive forces to maintain growth in this segment in the low single digits.
The industrial segment opened pipeline of projects is a close second right. After the automotive automotive one for Kevin.
Our film and electrolytic as well as magnetic sensors and actuators business units provide the primary products utilized in such segments.
Components able to sustain harsh environment working conditions continue to be in high demand by design engineers around the world and kimmitt product Roadmaps are well aligned to such needs.
Film Electrolytic has a healthy and solid list of projects linked to the industry 4.0, as well as various solar and wind.
When platforms, confirming our leading position in such sectors for many years.
On the MSR side on top of our core presence in Japan, and Korea market. We are now expanding design wins stories and other regions and in particular in the United States with our sensors products.
Thermal current MPS will sensors, and making significant inroads in several key accounts in the states in industrial automation and machinery equipment applications and telecom, we observed a general slowdown in the Fiveg rollout infrastructure although.
Overall fiveg related investment continues to gain momentum.
We remained focus on the design in efforts as we expand our product offering into Fiveg solutions from polymer and ceramic now into film products used in used for filtering and power conversion functions in cloud computing applications, we have a leading position with our solid capacitor product lineup.
After over two years of growth unit shipments of servers decline year on year in line with reduced Capex spending.
This decline was expected as data center providers work through excess inventory.
Mark the Mark as expected to recover for the remainder of this year.
And finished with single digit growth versus last year.
Pcs have rebounded this year in the tablet market grew significantly due to the product refreshes by major brands.
Our roadmap for tantalum polymer continues to accelerate our presence in the SSD.
And edge computing segments, both of which are still experiencing growth.
Kimmitt connect technology, a patented packaged solution for our ceramics group.
Enables high power density in a smaller form factor and is now proven to be in high demand and successfully meeting more stringent demand design demands from the market is adoption is rapidly increasing in a number of designs and we project to generate several incremental.
Dollars of revenue from such new projects and last we confirmed also this quarter the very robust activity in the defense and aerospace segment in particular in North America, driven by increased defense spending.
The number of design wins, we participate and continues to grow encompassing all the main systems like satellites radar and missile missile control units, our ceramic and tantalum military graded products are experiencing both solid growth year over year and this trend is expected to persist well into next year.
Now I'll turn the call back to Greg to discuss our guidance for the next quarter correct.
Thank you Bill turning to our outlook, we expect our second quarter sales to be in the range of 320 to 300 and $330 million down approximately 5.5% to 8.4% from last years second quarter.
The lower revenue number reflects the distribution channel correction, which bill just discussed.
That said, we believe our gross margin, we will continue to be strong and reflect the positive impact from our structural changes.
As we expect non-GAAP gross margin to remain between 33.5%.
And 35%, which is the same guidance, we gave last quarter.
SGN, a expenses should be $43 million to $45 million and R&D expenses in the range of 12.5% to 13.5 million.
Our global effective tax rate will continue to be at the same level around 25% to 28%.
Now, we'll turn the call back to Bill for some final remarks.
Thanks, Greg I want to end with saying that what I see from our new products lineup makes me very excited about the future procurement.
We remain closely engage with key transformative segments that will drive growth in the electronic components over the next decade.
We have several examples of wins, but I wanted to provide just one example of the electrification within the transportation industry in which we are participating.
Wireless power system technologies are now more and more deployed to reduce the need for a large battery in a vehicle and instead power at wireless Lee veal minimal magnetic infrastructure, which has placed underneath the driving lane.
The climate product portfolio is a great fit for such applications ranging from our core ceramic technology to our newest additions in the magnetic and ferrite product line.
Where we will see the beginning implementation in a test phase very soon in a couple of European cities.
These systems will charge the vehicle wild is moving on the roadway.
It's another way to Kim and is helping build a better safer and more connected place to live we see a great pipeline of projects for future organic growth and believe that we will continue to distinguish ourselves from our peers this fiscal year.
Once again, thanks to all of our employees around the globe, we develop these new technologies and produce our support our quality products operator, we'll now take questions.
Thank you at this time I would like to remind everyone in order.
Please press Star then the number one on your telephone keypad again, that's star then the number one on your telephone keypad.
Lots for just a moment.
Our first question comes from the line to Matt Sheerin from Stifel. Your line is open.
Yes, thanks, good morning.
<unk> first question Bill just regarding it.
The gross margin and holding up despite.
Revenue coming down.
And it sounds like there was some cost measures you took up particularly in EMEA too.
And if any.
What about the pricing environment is that helping you on the MLC see I know that you had some price increases kick in at the beginning of the year.
And whats the pricing environment like in the tantalum space.
Well you know.
Matt most are we as we mentioned in our previous calls most of our pricing at least certainly for our OEM contracts.
Our negotiated in the fall and they go into effect primarily in the in the first calendar quarter of the year. So.
For them, but by and large from for half of that is half of our business, which is on road OEM related those prices came in that first calendar quarter.
And they are under contract and that those are those are holding so those are steady.
The market is still tight in large case ceramics as you know.
And at least in the high CV space.
Hi, CV pricing is stable.
There is some certainly in the commercial when you get into a lowes lower CV and some of the commercial chips. There is some pricing pressure there we've baked that into where we see our margins going.
And then from a.
Polymer tantalum perspective, I think.
One reason I.
I guess I emphasize the 70% polymer is that we aren't the same our dynamics for our tantalum group is different than it was years ago as immuno to his decline we have focused on on growing polymer and with that mix that that helps our margins as well as we did take steps to reduce manpower.
And get ahead of the curve as we saw where the market was going to go with.
With the immuno too.
Several months ago. So we were already positioned from a cost structure perspective for the most part as we came into this quarter to recognize the fact that we would have.
Less volume both in the June quarter in the September quarter from.
Even though too.
Okay Thats helpful. And then if you look at the in the MLCC space, where you play.
Hi case size high capacitance area.
Whereas some of the major competitors have been moving away do you get a sense of when that's happening I know some of those deadlines have been pushed out.
Is that part of the backlog that you are seeing.
Yes, I mean, certainly as contributing to keeping the keeping it where it is and I think it's actually a good thing.
That some of the those who have decided to exit certain case sizes are doing it.
At a pace at a pace that is taking it out over time.
Because it would it would make the situation I think with customers extremely difficult because the rest of us not just commit but others that are make still making those case sizes would have difficulty filling the gap immediately.
As you know, we're continuing to increase our capacity.
So and that happens over time, we're limited by how fast we can get the equipment in from the equipment manufacturer. So yeah. It is still tight they are still from what we hear and see.
Continuing to say that and continue to extract themselves from some case sizes.
They have spread out the timeframe they move back some of the the drop dead date, if you will of when they will.
Completely stopped making those so I think thats actually as I said I think thats a positive.
It's going to keep a tight.
For a while.
Until.
Until all the capacity comes online over the next literally over the next 18 months two years. It takes us to get all of our capacity and I think it's probably the same for our competitors who are all buying the equipment from what I understand from virtually the same.
The same manufacturers in in Japan.
Okay, Great and just lastly for me just regarding the F. any business you talked about some some content drivers there, but that business has been really low margin, particularly relative to the strength that you're seeing in your other businesses I know you've talked strategically about why it makes sense to keep that business, but what's the long term strategy. What is what do you as a management team and the board looking at in terms of what that business, maybe or should look like in the next few years.
Well, we have our we have our internal.
Target Matt.
To drive that business.
And of course like any business will we continue to evaluate what our options are.
Whether that's to continue to drive topline or to look and see whether or not there is another alternative.
That is required for that for that business and for the rest of the company. So were work gets under continued evaluation.
And there is a big pipeline there I mean, it's a it's a you know things are are ramping up and heating up in the electrification of vehicles and that is driving a lot of the pipeline. So we'll continue to evaluate and make sure that the that pipeline actually will turn to.
Positive bottom line results that will drive the margins higher than they are and certainly I don't disagree with you that that a 6.1% gross margin is not acceptable and is too low.
Okay, alright, thanks, so much.
Thanks, Matt.
Our next question comes from the line of Craig Ellis from B. Riley FBR. Your line is open.
Yes, Thanks for taking my question and congratulations on the good execution gentlemen, Bill I wanted to follow up with a question on gross margin as it relates to cost and cost reduction so it's clear that company.
Sought some slowing that's coming in parts of this business and and worked proactively too.
To make some cost moves the question is if we have.
Modeling macro going forward as we have now what are some of the other things. The company can can do on the cost reduction side to help protect gross margins, where they stand now.
Well, there's always that.
First we do look at.
Our direct cost as well as.
Indirect so.
At this point and we have depending on where we're manufacturing.
The fixed costs are actually fairly low as a percentage of our total costs.
Somewhere around that maybe at 19%, 20% kind of level. So the we want to make sure that we flex.
As best we can our our direct costs, which are the majority of our cost in our manufacturing facilities.
I think we from a from other than that I don't think were in a position.
We don't see we're in a position at this point, where we need to take any any drastic actions.
And overall fixed cost for the company on a global basis at this point.
I think it's our for our product mix somewhat as I said somewhat we're not immune to this we will see some.
Declines to because of distribution channel and some softening in the automotive.
But keep in mind that from an automotive 65% of our.
Our ceramics business or so is automotive and we're still running full they're still trying to make sure we can serve.
The demand for the automotive, which is short has been it's a little bit so the dynamics are different because while the automotive.
Units are declining there's a shortage that's been created in large case size its needed and automotive and that's where our focus so we're a little bit.
Different than than some of our others you might look at.
To compare us to because that's where our focus is and that Theres still short there will continue to stay short there even with the declining number of units made for the year.
And then the same with.
Polymer we're starting to see.
Because of the shortage, where I think we're getting good inroads in automotive polymer grade.
Products that are starting to get designed in.
In the automotive that previously weren't so while that doesn't kick in immediately it has a future effect to kind of offset that to your point overall global slowing down of across the board. So I think our general mix of insulin capacitor business group is really is holding up well Craig I'll just add to that so we did call out the.
In film and Electrolytics, the consolidation of drawn into Portugal. So thats that movement is is underway or is really completed as far as the equipment, but the savings will come really over the next few quarters and so we would expect to.
See several million dollars of savings there related to.
Specifically related to that initiative and film and electric Electrolytics and other activities kind of like that in film and Electrolytics and as well as in M. essay that we're working on to improve the performance of both both of those two segments.
That's very helpful color gentlemen that the second question is on the revenue guidance. So it's clear that.
The company sees continued strength and its OEM business and with guidance, you're making an adjustment for some of the softness that you see.
And distribution the question is.
Based on what you see in distribution does does the guidance incorporate getting.
Inventory levels and the distribution adjustment complete in a quarter, where should we expect that there will be a further adjustment in December and potentially subsequent quarters for the trends you're seeing in that channel.
Well without forecasting actual revenue number for the third quarter.
Third fiscal quarter, I would say that we expect it will take a couple of quarters for the distribution inventory to totally correct, but I don't at this point, it's too early to say whether or not it has an additional impact on our our topline I think we wait we wait a little longer and get into this quarter, but I think.
We believe we are we will be able to manage that pretty well as I said in my remarks.
We actually have a couple of distributors. When you look at the turns and inventory that actually have pretty fast still very high turns and.
To have two out of three regions and its actually reasonable in the third region. So they're a little short, they're still turning fast and so its a matter where we direct.
Our sales and so we are trying to as I met set mentioned, we're trying to.
Manage getting components to them, so those distributors, who still need it based upon the statistics about fast they're turning their inventory so.
I think that that will that is going to stabilize our revenue versus.
See a continued decline so I'm optimistic that.
We're kind of at the level, where we'll be.
But it will take two quarters, we want another we won't see of I think initially first come to this calendar year. There is a lot of talk about the second half of the year will be back with things would return ring go back up Im not sure they'll do that in the third fiscal quarter, but I think I'm not sure that they'll continue to go down.
That's very helpful color. Thanks for that and then lastly, it was a quarter ago when the company.
Set for a longer term target financial model and and there is an inorganic inorganic growth component to that model. The question as you continue to make investments in.
In your IP infrastructure and other areas. How are you feeling about the potential to execute on M&A and is there anything that investors should be thinking about with regards to sizing or other parameters.
As we look at capital deployment to that area.
Yes, I don't think I'll talk about size, but I think we haven't changed our view.
Of what our long term.
View in that so that was a five year view on the on what we put out we are.
Putting getting our infrastructure put in place specifically in the ITC area.
By getting.
On one plus one platform and on the type of platform, where it is easier for us to.
I will I'll use the term plug and play.
To be able to plug in an acquisition into our systems.
Easier and faster.
That will we might have done with token so we're positioning ourselves to be able to do that.
It is a it is a longer term view. So we are working on.
Directionally, where thats going to take us and when we're prepared to or in a position to to discuss that with with everyone. We will certainly do that.
Thank you very much and good luck.
Thank you it's correct.
Again last a question. Please press Star then the number one on your telephone keypad. Our next question comes from the line of Maynard.
From Macquarie Your line is open.
Hi, good morning, Thanks for taking the questions I just want to make sure I am completely clear on the distribution inventory. If large case size automotive ceramics are in shortage and running at 100% utilization I guess why is their distribution channel destocking or are you talking about other products in the distribution channel.
Yes, let's dustless, let's put let's put large case high CV aside.
Lets talk immuno too and then commercial will say lowered the low CV.
Low capacitance.
Commercial small smaller case, but still even in the large case size, but a commercial chip noted non automotive grade non military aerospace et cetera.
There is a build up of inventory there. So those are chips that can be used in a variety of.
Of applications that are not doesn't require automotive grade Ics et cetera, and its not hide and is not high CV. So there is a build up there that were.
We are working through and I mentioned I think it was Matt on the price there is some price pressure for for those we've baked that into our forecast.
We put out today.
And then im going all to specifically built up.
We believe it built up because when everything was short.
Last year.
There were a number of distributors, who built up the middle to inventory I think under the theory that some some may want to switch to immuno to where they can where there is a crossover.
And they can use immuno two versus a small case I ceramics.
And that after they did that of course, the market softened and they ended up with quite a bit of immuno two on hand, and thats good and that's what they're worth that's what's going to take US a couple of quarters and the MLP immuno to segment to work off as the inventory that got built up and then on top of that the market behind that.
In the immuno to space is also soft so that's why for us.
You noticed in the.
Comments on the tantalum.
Product line that the tantalum and mental two product line was down.
About $12 million for the for the.
For the quarter so.
That's what's driving that's what's driving the inventory changes there, but it has as far as high CV. We're still that's that's really isn't.
Not a lot of excess out there we're continuing to.
Move that to our primarily to our OEM customers, that's not moving through distribution at this time.
We still have fairly high capacitance Cvs for us, we still have fairly long lead times anywhere depending on the component anywhere from 12 to 45 weeks.
So.
Theres still some lead time because of the rig the backlog and the current requirements.
We're still we're still.
Running that 100% for that.
Great and can you just remind me in terms of fiscal 19, what youre.
Token related fines and cash outflow was.
Let's see.
It was in the 40 $40 million range Maynard I don't have that specific number.
Right at my fingertips, but it was in that 40 40 $45 million range.
Okay.
And specific to.
Capital allocation program Im just wondering kind of where you are in the process in terms of.
Thinking about other uses of capital share repurchases.
Any plans to increase the dividends.
Thanks. Good question of course, we just didn't know when the dividend perspective, we just instituted our dividend last November .
So thats early in the process, but certainly and it pushes you started a level, where you allow yourself to be able to do increases and I think.
Long term certainly the company will.
And regarding the share repurchase.
That's a continuing dialogue at the at the at the board level The board has.
Requested management to basically provide them data with the study of of the of what would be the appropriate size.
Program for a company with our.
Financial position, our cash position.
Outstanding shares et cetera, et cetera. So we are in the process of doing that and we'll we'll provide that to the board and the board will use that as a part of their guide to determine.
Whether or not they go into a share share purchase program.
Okay, Great I'll get back in the queue. Thanks, guys.
Again to ask a question. Please press Star then the number one on your telephone keypad.
You bet.
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And there operator questions at this time please continue.
All right. Thank you well if there's no further questions then.
Thanks, everyone for attending our conference call today, and your interest income it and we'll talk to you again next quarter. Thank you.
And this concludes today's conference call. Thank you for your participation have a great day and you may now disconnect.