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KEMET Corporation (NYSE: KEM): A Leading Global Supplier of Passive Electronic Components, Interview with Per Loof, CEO

on 10/20/2017
KEMET Corporation (NYSE:KEM), a leading global supplier of passive electronic components, offers the broadest selection of capacitor technologies in the industry, along with an expanding range of electromechanical devices, electromagnetic compatibility solutions and supercapacitors. KEMET's vision is to be the preferred supplier of electronic component solutions for customers demanding the highest standards of quality, delivery and service. We learned from Per Loof, CEO of KEMET, that they do many of their manufacturing activities in places like China, Vietnam, Thailand, Indonesia, Japan, Macedonia, Bulgaria, Italy, Portugal, Sweden, Finland, Mexico, and in the U.S. KEMET's major component is capacitors but they also make inductors, filters, suppressors and sensors of various types. According to Mr. Loof, they supply about 95% of all dielectrics. We learned from Mr. Loof that KEMET is known for its innovations and needs to stay in the forefront of technology. They are the market leader in conflict-free tantalum and, in particular, the newer organic polymer capacitor field. Mr. Loof is especially proud to be supplying one of the Formula One competitors, as well as the new Orion space vehicle that is currently being made. The company employs about 16,000 people globally. Its annual revenues are approximately 1.2 billion USD and they make about 1,400 pieces every second.

Dr. Allen Alper: This is Dr. Allen Alper, Editor-in-Chief of Metals News, interviewing Per Loof, who is CEO of KEMET. Could you give our readers/investors an overview of your company?

Mr. Per Loof: Certainly. We are a global electronic component supplier. We have manufacturing operations in places like China, Vietnam, Thailand, Indonesia and Japan. In Europe, we're in Macedonia, Bulgaria, Italy, Portugal, Sweden, and Finland. We have a huge operation in four places in Mexico and also some in the U.S. We're about 16,000 people globally, and our annual revenues are approximately 1.2 billion USD. We're listed on the New York Stock Exchange.

Dr. Allen Alper: That's excellent, and your symbol on the New York Stock Exchange?

Mr. Per Loof: KEM.

Dr. Allen Alper: Very good. Could you tell our readers/investors a bit more about the markets you serve and the applications?

Mr. Per Loof: Our major component is capacitors, but we also make inductors, filters, suppressors, and sensors of various types. In the capacitor market, anything that has voltage requires a capacitor. We take pride in the fact that we supply about 95% of all dielectrics. If you look at it by the various groups, in tantalum we supply both MnO2 and organic polymer capacitors. We also do ceramics, film, aluminum electrolytics, and paper.

Dr. Allen Alper: That's excellent.

Mr. Per Loof: We are in just about every field. If you look at the segments we serve, industrial is a large part of what we do. Automotive is a large segment, as are computers, medical, defense, and also consumer electronics.

Dr. Allen Alper: That's excellent. What is the outlook for the market? What's driving it and how does the future look for your products?

Mr. Per Loof: We follow the trends in electronics. We all know we are using a lot more of these devices today than we did before. That’s happening just about everywhere now. And there are various forecasts on how that will impact the electronics industry, but all are pointing to an upward trend. Today, most people have five or six devices that are all connected. Few are happy with the bandwidth available. So there's going to be a continuous need for more electronics and more capability as more and more devices are connected. Look at what's happening in the automotive area, where electrification is a growing trend and probably at a much faster rate than people think.

Today, there are two million vehicles produced that are hybrids or electric out of approximately 97 million light vehicles manufactured globally. That's likely to be 20-25 million over the next eight or nine years. All of that points to more productivity and more use of electronics, which should help our markets grow as well.

Some people are saying the number of additional servers we will need over the next five to six years is going to be in the 400 million range, which is a huge number. Today, there are maybe 40 million wearable devices in use. That's likely to double over the next three to four years. All of those devices will require bandwidth and need to be connected. That is where companies like KEMET and others will play a role. Right now, it's looking pretty good; the demand is strong and I believe it is all driven by this need for connectivity.

Many of the things we use today did not exist 10 years ago. There was no Twitter, no iPhone, etc. Facebook goes back a little longer but this has all happened over recent years. The largest taxi service has no vehicles but does have a big need for connectivity. The largest hotelier, if you want to call them that, Airbnb, has no hotel rooms but a lot of connectivity. So many things are happening in the world of electronics due to our need to constantly be connected.

Dr. Allen Alper: That sounds fantastic. Could you tell us why tantalum is so important?

Mr. Per Loof: Tantalum is important to us as it is our largest business. We are the market leader in tantalum and, in particular, the newer organic polymer capacitor field. The reason tantalum is favored by many is that it has the best volumetric efficiency of any capacitor; meaning, less real estate is required to provide the same punch. Therefore, design engineers will favor that in many applications. If you think of it in terms of a circuit board, one tantalum capacitor can replace ten ceramics in some applications and, of course, in a crowded space that makes a big difference.

Dr. Allen Alper: That sounds excellent. KEMET also uses some other materials such as silicon nitride and others. Could you say a few words about that?

Mr. Per Loof: We are trying to figure out how to deal with the new silicon capabilities such as Gallium nitride and silicon carbide that are coming out in the marketplace. That will impact how capacitors are going to be used. So we are looking at those silicon technologies and semiconductor technologies that are coming forth. It's going to somewhat change how we deal with some of those applications. We're watching that space very carefully to make sure that when those technologies become more prevalent in the semiconductor area, we have the correct products to deal with those capabilities.

Dr. Allen Alper: KEMET is known for its innovations. Could you tell us a bit about your innovations?

Mr. Per Loof: We're a technology company. There are 118 elements in the Periodic Table. KEMET touches half of those today, probably with more to come. Our technology is very chemistry-based. Our research fellows sometimes wear many hats, but they are chemists for sure. We need to stay in the forefront of technology if we are going to develop technologically in the long term. We at KEMET consider it incredibly important to be technologically relevant going forward and have the capabilities required by the new automobiles-- that is, the new electric vehicles that are coming forth.

Take the Formula One, for example. These fast race cars are now hybrids. They have a smaller combustion engine, but they also have electric motors, one on each of the axles. For one of those competitors, we provide the technology from a capacitor perspective for their electric motors. This is technology at the absolute highest level. If you want to be able to compete in the Formula One race, you need to have the best technology available and then some. We also are very proud of the fact that we will supply about 10 pounds of ceramic capacitors to the new Orion space vehicle that is being made in this country. Additionally, we have just completed support of our Trident II nuclear missile fleet upgrade. So you can imagine, these are applications that cannot fail! We like to say, “When failure is not an option, give us a call.”

Dr. Allen Alper: That sounds excellent! Is that one of the reasons engineers recommend KEMET?

Mr. Per Loof: I think so. We make about 1,400 pieces every second. Our objective is to have zero defects, no defects at all, one hundred percent complete quality. Of course, that's a tall order. We produce upwards of 11 billion parts per quarter. The total number of parts that fail on a monthly basis is about 120. That's a very, very small number out of a very large number of parts being produced. Quality is incredibly important. It is also important to ensure that engineers find it easy to design us into their plans. To that end, we have spent considerable effort in acquiring a particular software company that specializes in this, and gives our customers’ engineers the tools to simulate what's required and see what the part will look like as you put them on the circuit board. That will give us an opportunity to be helpful to our clients and, hopefully, result in them buying some products from us.

Dr. Allen Alper: That sounds fantastic. Could you update our readers/investors about the conflict mineral story and how KEMET is avoiding buying conflict tantalum?

Mr. Per Loof: In 2010 and going back even further, we had to avoid buying tantalum ore from the Congo, in particular, for obvious reasons. Also, our customers would not accept tantalum that originated from Congo because they felt there was a risk it would be tainted; meaning, their money would be used to fund various illicit activities. But in 2010, a provision known as Section 1502 in the Dodd-Frank Act provided a procedure on how to go into the Congo and source your material. If you followed that procedure, you would be conflict-free even in a legal sense.

You sign a note and send it to the SEC and they conduct audits. I saw this as a great opportunity to go back into the Congo, which, most people will agree, has the best tantalum material in the world, and create a conflict-free supply chain from the Congo all the way to our company. It required us to make investments in smelters along the way, find a miner in the Congo with whom we could work, and help him invest in capabilities to ensure the tantalum was conflict-free and enable him to meet the demands from a volume perspective.

In the Congo, we used a system called the "bag and tag," driven mainly by the OECD. The tin research experts came up with the model. You put the ore you mine in a bag, weigh the bag and tag it. You can follow that particular bag all the way through the bush in the Congo, across Lake Tanganyika, which is near where our mine is, across Tanzania and on a boat from Dar es Salaam to our smelters. That has been extraordinarily successful for us and we have yet to lose one bag. I'm not saying we won't. But we've been doing this now for four or five years and we have lost no material along the way.

We were one of the first companies to claim the “conflict-free” distinction, as acknowledged by the SEC. We continue to take a lot of pride in that. We have our main mining activities in a small village called Kisengo in the Katanga Province in southeastern Congo. Together with the miner, we started a foundation to help with the infrastructure of the village. We built the hospital that has catered to over 30,000 patients as well as a school that has 1,500 students. We've built roads, bridges, and even solar-powered street lighting. We also drilled wells in the village to provide fresh drinking water, which is the big problem in many parts of the world. We have created a better situation for the people in the village and it has enabled us to source the best material in the world, available at highly competitive prices. This has helped the entire industry make tantalum a more cost-effective product.

It's a fascinating story where good business and doing good actually coincide. I've had the opportunity to testify before Congress as to what we did, why we did it and why we think this provision of the Dodd-Frank Act is very good and actually helping Congo.

Dr. Allen Alper: Excellent! You can be proud of the work you and your team have done in the Congo. During this time when your applications are growing, it’s good to have a conflict-free supply. That's very important. Could you tell us a bit about your background and the background of your team?

Mr. Per Loof: I am an economist by training. I was born in Sweden but I've spent my entire career working for American companies. I did all my training in Sweden and all my schooling in university in Sweden. I moved to the U.S. right after that and since then have lived in various parts of the world. I’ve been in the U.S. now for quite some time. The U.S. is home now. This is the second public NYSE listed company I've managed. I ran a company called Sensormatic and sold that company to Tyco a number of years ago. Then I started with KEMET. Prior to that I was with NCR and before that, with AT&T. Prior to that I was with Digital Equipment, which now is part of HP. So I've been in the technology space all my career and now have been with KEMET for the last twelve and a half years.

Dr. Allen Alper: That's excellent! A great background! Could you highlight the background of your team?

Mr. Per Loof: We have a pretty diverse leadership team from many countries. As far as the business groups, a chemist and physicist, originally from Sendai in Japan, runs the magnetics and the sensors and actuators business. The gentleman who runs our film and aluminum electrolytics business is a German and an engineer by background. The folks who run the ceramics business and the tantalum business are both engineers with MBAs from Clemson University. Our CTO has his PhD in chemistry from Berkeley. The person who runs our M&A business also has a PhD in chemistry. The person who runs Marketing has a PhD in Business Administration. So we have a wide variety of well-educated people from various parts of the world. I think our leadership team is comprised of eight nationalities. We only have three women but we're working on that, too.

Dr. Allen Alper: That's great. Sounds like you have a diversified team.

Mr. Per Loof: Very diverse.

Dr. Allen Alper: Different disciplines, technical and financial, so that sounds great. Could you highlight a bit about your operating results?

Mr. Per Loof: Well, we just closed the first quarter, which ended June 30. We had $274 million of revenues, and we returned $.33 on the bottom line to our shareholders. We have about 50 million shares, so you can do the math easily on our bottom line performance. Our gross margin performance was 28%, which is better than our competitors this quarter, so we were very happy about that. We have indicated to the street that we believe the third quarter is going to be a decent quarter. This is our second quarter, but the third calendar quarter is going to be decent.

We have indicated that we believe the year is going to be a decent year as well. So we're looking to see the operating performance improve, and we are enjoying a strong market at the moment. Markets won't always be at the top, so we need to make sure we have a cost portfolio that we can afford even when the times are a little tougher. So we've made great efforts to ensure that the company can support the costs we have even when the revenue picture is a bit bleaker than it is at the moment.

Dr. Allen Alper: That sounds excellent. Could you tell us a little bit about your balance sheet?

Mr. Per Loof: We have about $240 million or so in cash. Our total debt is around $340 million and is basically a term loan. Our inventories are about six or seven times our revenues. We like them to turn six or seven times annually. That's pretty much where they are. Our balance sheet has improved steadily. We have a very nice customer base so we really have no issues with our receivables. Our payables and receivables are pretty much in balance. We are enjoying a growing cash position. There have been questions asked such as, what are we going to do with the cash, and I jokingly say I'm going to look at it for a while. With the balance sheet improving, we have more opportunities to grow the business.

We just acquired our Japanese partner, TOKIN, with whom we were in a joint venture partnership, together with NEC, for four years. That acquisition has added talent, capability, and cash as we merge their balance sheet into ours. That transaction was completed in April. TOKIN is now 100% owned by KEMET. We are in the process of integrating that combination into the various aspects of our operation. We financed the acquisition by selling a piece of our business for about $420 million, over ten times EBITDA on that unit. NEC and we agreed that we would pay back the debt that the joint venture owed to NEC, which was $220 million. We would pay $50 million for the remaining shares, and we will split the difference left after the acquisition between the two companies.

We basically paid them $50 million. We received $95 million, to be exact, from the transaction of the unit we sold. The cash from the joint venture, which at the time was $160 million, was also transferred over to KEMET. So it was a transaction that was a little unusual but transformed the company in many ways, as well as our balance sheet. As a result, we were also able to refinance our debt, which was previously a high-yield loan. We were able to refinance that with a term loan that actually improved our bottom line performance on an annual basis by $13 million. So, all in all, this has had a great effect on our company. If you have checked our stock price, I think the markets have also recognized this. Those who believed we were going to do this and bought into the stock a year to a year and a half ago have done very well and we're very happy for them.

Dr. Allen Alper: Sounds excellent! Sounds like it was a very strategic move.

Mr. Per Loof: And a little bit of a luck.

Dr. Allen Alper: Sounds great. What are the primary reasons our high-net-worth readers/investors should consider investing in KEMET?

Mr. Per Loof: Well, I typically don't give advice as to what they should do. In a year and a half we are turning 100 years so we will celebrate that. We’ve been around a long time, as you can imagine. The strategy that evolved into the final acquisition of NEC TOKIN six months ago was developed in 2007 and we have been very conscientious in the way we've been driving that. Of course, we've seen ups and downs during that time. We experienced the whole global recession at the end of the first decade and we are now in the process of developing our next long-range plan. Clearly, as does every company, we have budgets, quarterly reports and strategic plans that may go on for years, but mainly what I would call a three-year budget more than a strategic plan.

And then we have what we call our long-range thinking. We actually call them our “adjacency model” because we like to think in terms of going out and doing things that are outside of what we do now, but adjacent to what we do from a product, geography, and a customer perspective. So we developed an adjacency model back in 2007 that pointed to a couple of facts: that we needed to expand our product range, that we needed to add depth to the ones we had, and we needed to have a bigger geographic reach. Japan was a glaring example of zero business at the time. And now we're in the process of putting together adjacency model 2.0 which will guide our investments over the next eight to ten years to ensure that we can stay technologically relevant for our customers.

Dr. Allen Alper: Sounds excellent. Sounds like you're in a great market, a growing market, and you have an excellent source of material worked out and a great technical team and knowledge and engineers. Sounds like you and your company are doing all the right things.

Mr. Per Loof: Well, we certainly try.

Dr. Allen Alper: That's great. Is there anything else you'd like to add, Per?

Mr. Per Loof: We use copper, aluminum, zinc, tin, tantalum, nickel, cobalt, titanium, caladium, silver, nickel, etc. We use a lot of materials, a lot of metals, and so we try to stay current on the trends in those markets. We are making sure we cut the deals that we need to and when we need to, because with the volume we have, we use many of these on a daily basis.

Dr. Allen Alper: Well, that's excellent, very important.

Mr. Per Loof: We use a thousand tons of copper, 675 tons of aluminum and 540 tons of zinc. And the list goes on and on.

Dr. Allen Alper: Excellent!

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

Richard J. Vatinelle
Vice President and Treasurer

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