Kemet Corporation (KEM)
Q3 2013 Earnings Call
November 1, 2012 9:00 am ET
Per Loof – President, Chief Executive Officer
William Lowe – Chief Financial Officer
Dean Dimke – Senior Director, Marketing Communications and Investor Relations
Ruplu Bhattacharya – Bank of America
Hamed Khorsand – BWS Financial
Matt Sheerin – Stifel Nicolaus
Amitabh Passi – UBS
Marco Rodriguez – Stonegate Securities
Tony Kure – Keybanc
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Thank you. I will now turn the call over to Mr. Dean Dimke. Please go ahead, sir.
Thank you, Suzette. This is Dean Dimke, Senior Director of Marketing Communications and Investor Relations. Good morning and welcome to Kemet’s conference call to discuss our financial results for our second quarter for fiscal year 2013. On the call with me today is Per Loof, our Chief Executive Officer, 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 home page. Once there, please click on the second 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 addressing expectations or projections about the future are forward-looking statements. Some of these statements includes 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, 10-Qs, and recent registration statement filings for additional information on risks and uncertainties.
Before I turn the call over to Per, I would like to mention that the company will be presenting at the UBS Global Technology Conference on November 14 in New York City. A press release with the details will be forthcoming in the next day or so.
Now I’ll turn the call over to Per.
Thank you, Dean, and good morning. Our second quarter of fiscal year 2013 saw our net sales at $216 million, which was more or less on our forecast of flat to slightly down over first quarter. However, our adjusted EBITDA for the quarter was 16.3 million, which was an increase of 2 million over the prior quarter generated both from adjusted operating margins that increased to 16.3% from 15.2 over the prior quarter, and a reduction in SG&A expenses.
As you’ve heard from other technology companies, economic conditions are not improving and in fact have softened over the last quarter as uncertainty throughout the market persists. Over the course of time, we have discussed with you the drivers of our revenue from a channel perspective, and I thought it might be helpful to look at it graphically. If you turn to Slide 3, which Dean indicated is on our website for this call, there’s a graph depicting our orders received by channel over the last couple of years on a quarterly basis. The key takeaway from this information is that the volatility we have seen and continue to see is primarily in our distribution channel. The biggest decline we saw in this quarter and continue to see as we head into December is weakness in distribution.
Now referring to revenue in Q2, the OEM channel was very stable, down just slightly, and EMS is actually up 7 million quarter-over-quarter. The disti in the Taiwanese business, read laptops, is what caused the quarter-on-quarter drop in components. Total drop was 2%. By region, of course, Europe is a drag on revenues and this will continue for another quarter or so without significant signs of a pickup; however, it seems to have bottomed out. But the picture is not consistent – automotive is very stable, industrial is where the issue resides. The uncertainty that persists affects the investment plan clearly.
We are of course affected by the macro dynamics. It is important to understand, however, that our market share remains very stable in all business groups. The overall macro economic environment is driving our top line and the volatility, and as you can see from the slide, it is primarily a function of our distribution business. We cannot change the macro economic outlook and we cannot change the way our distribution channel manages its order book or inventories. POS is very stable to slightly up, actually, in October; but the overall uncertainty that exists drives our dist departments to lower their inventories, and that affects the entire industry. I do, however, believe that we will see some recovery in the March quarter.
Having said all that, what are we doing about it? Since we do not believe that we can rewrite the industry playbook, we need to realign our cost structure to operate profitably at revenue levels we are seeing today, in fact even at quarterly revenue levels that might be $25 million lower. We announced on our last earnings call that we are moving aggressively to realign our cost structure. That is happening and I am pleased with the progress being made in regards to implementing these realignment initiatives. One aspect of the announced plan has included a worldwide reduction in force. Together with the savings from the vertical integration of our tantalum supply chain as well as the restructuring of our F&E business, we expect to see an improving break-even point which not only will have us return to profitability at these lower revenue levels, more importantly it will position us for substantial gains once the economy regains traction. As Bill reviews the quarter with you, he will provide some more color on our cost reduction actions and savings expected.