Kemet Corporation (KEM)

KEM 
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KEMET Corporation (KEM)

F3Q12 Earnings Call

February 2, 2012 09:00 am ET

Executives

Dean W. Dimke – Director of Corporate and Investor Relations

Per-Olof Loof – Chief Executive Officer

William M. Lowe, Jr. – Executive Vice President and Chief Financial Officer

Analysts

Matthew Sheerin – Stifel Nicolaus & Company, Inc.

Wamsi Mohan – Bank of America/Merrill Lynch

Sherri Scribner – Deutsche Bank

Hamed Khorsand – BWS Financial

Anthony Kure – KeyBanc Capital Markets

Marco Rodriguez – Stonegate Securities

Presentation

Operator

Good morning. My name is Lincy, and I will be your conference operator today. At this time, I’d like to welcome everyone to KEMET’s Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Dean Dimke, you may begin your conference.

Dean W. Dimke

Thank you, Lincy. This is Dean Dimke, Director of Corporate and Investor Communications. Good morning. And welcome to KEMET’s conference call to discuss our financial results for our third quarter ending December 31 fiscal year 2012.

On the call with me today is Per Loof, our Chief Executive Office; and Bill Lowe, our Executive Vice President and Chief Financial Officer.

As a reminder to you, our presentation is available on our website that should help you follow along with the financial portion of our presentation this morning. Please go to kemet.com and click on the Investor Relations tab in the top right portion of our homepage. Once there, please click on the third quarter conference call link. That will bring up a few slides that we will call to your attention as we are covering those topics.

Before we begin, we would like to advise you that all statements that address expectations or projections about the future are 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, but involve a number of risks, uncertainties and assumptions. Please refer to our 10-Ks and 10-Qs and recent registration statements, filings for additional information on the risks and uncertainties.

And now, I’ll turn the call over to Per.

Per-Olof Loof

Thank you, Dean and good morning, everyone. As anticipated, the demand for our third quarter ending December 31, 2011 fiscal 2012, softened relative to the first half of our fiscal year 2012. The revenue came in at $219 million, in line with our amended guidance, which we released on January 13. As many have reported, demand in Europe in particular, but also in Asia softened towards the end of the year.

Furthermore as we have been saying and expected our distribution partners continue to rebalance our inventory. Non-GAAP operating income was $10.3 million or 4.7% of sales and non-GAAP diluted EPS was $0.04. Third quarter order intake was up slightly over second quarter and we see no reduction in our market share. Certainly demand for the quarter was negatively affected by the economic realities that I have described. However what is encouraging is that in the quarter where revenue is the low we’d like it to be; we still made money and added $21 million in cash from operations. Several years ago that would not have been the case.

Our strategies which include maintaining a lower cost structure with a reduced break-even threshold focusing on grow our share markets that require more customized capacitance solutions and seizing upon opportunities that bring immediate value to our stakeholders helped us remain in profitable even in less than ideal economic environment.

Approximately two weeks ago we outlined our comprehensive economic and charitable program related to the procurement of conflict free tantalum ore in the Democratic Republic of Congo. The implementation of this closed pipe approach from mine to Conflict-Free Smelter was Tantalum Business Group’s second step of the previously announced corporate vertical integration strategy, which focuses on gaining greater control of our critical raw material supply chain and cost containment independent of the particular capacitance solutions.

The first step was a start-up of our tantalum wire manufacturing assets over one year ago.

This morning’s announcement that KEMET has signed an agreement to acquire all of the outstanding shares of Niotan Incorporated, a leading manufacturer of tantalum powders, from an affiliate of Denham Capital Management LP was the defining third step in the effort to completely vertically integrate KEMET’s Tantalum business from the mine to the production of tantalum powder to the manufacture of capacitors using that powder.

Niotan has been a significant supplier of tantalum powder KEMET for several years. And while we still require specific powders from other suppliers depending on the market demand, the Niotan operation, the largest in the western hemisphere makes KEMET the only manufacturer of tantalum capacitors of any appreciable size to be completely operationally [particularly] integrated.

Keeping with the vertical integration strategy, the key drivers for this acquisition were as follows: The ability to control a substantial portion of our supply chain in a business that has been considerably raw material speculation over the past 18 months, resulting in raw material price hikes of over 300%. These price hikes and the necessary increase of that flow-through to our customer base created some anxiety in the market relative to deciding in tantalum capacitors and solutions.

Unchecked, this could have caused some long-term migration away from tantalum, where ever possible, the less desirable, a potential less reliable, but more cost manageable solutions. We believe by taking this action, we will leave the industry in increasing the market’s confidence for the designing of tantalum capacitors.

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