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Kemet Corp  (NYSE:KEM)
Q2 2019 Earnings Call
Aug. 01, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Tom and I will be your conference operator today. At this time, I would like to welcome everyone to the KEMET's First Quarter Fiscal Year 2020 Earnings Conference Call. [Operator Instructions] Thank you.

I would now like to turn the conference over to Mr. Richard Vatinelle. Sir, please go ahead.

Richard J. Vatinelle -- Vice President and Treasurer

Thank you, Tom and good morning, everyone. This is Richard Vatinelle, Vice President and Treasurer. Welcome to KEMET's conference call to discuss the financial results for the first quarter of fiscal year 2020, which concluded on June 30th, 2019. Joining me today on the call is Bill Lowe, 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 in the financial portion of the presentation. Before we begin, we would like to advice you that all statements addressing 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 and they involve a number of risks, uncertainties and assumptions. Please refer to our 10-Ks or 10-Qs and our registration filing statements for additional information on the risks and uncertainties. On August 29th, we'll be presenting at the IDEAS Conference in Chicago. And on September 25th, we'll be presenting at the Sidoti Fall 2019 Investor Conference in New York.

Now I will turn the call over to Bill.

William M. Lowe -- Chief Executive Officer

Thank you, Richard and good morning, everyone. We exceeded our guidance this quarter in virtually every category, with a substantial increase in our bottom line, with a top line growth of 5.4% over last year's first fiscal quarter. Looking at the numbers, we started out strong with revenue at the high end of our forecast range of $345.2 million and GAAP and non-GAAP earnings per share of $0.68 and $0.82 per diluted share respectively. We continue to separate ourselves from others in the industry with revenue growing year-over-year and both the gross margin and operating margin lines continuing to increase with expected sustainability for future quarters.

It's worth repeating my comments from last quarter that the structural changes we've made in the business over the past few years are the drivers for our financial performance. These changes involved vertical integration of our tantalum supply chain, a focus on specialty high CV ceramics and the TOKIN acquisition, which were fundamentally game changing. You can find these listed on slide three of our webcast slides.

We are not immune to the industry dynamics, but we are somewhat insulated with our product focus. There are many moving parts today that have an effect on our industry and on the company specifically, but I believe we are uniquely positioned to address them and continue with excellent operating performance this fiscal year. For instance, if I address three key areas quickly, China tariffs, the distribution channel and the slowdown in the cellphone market affecting ceramics.

First, the Chinese tariffs, which are the primary product for us impacted here at KEMET was our polymer components made in our China facility. Recently, we received notice that our petition to remove these products from the tariff were approved, while our polymer capacitor is no longer subject to the tariff imposed by US government from our products from China today. While overall this is a small amount of the total supply chain, it does level the playing field against those competitors not manufactured in China.

Distribution, you've heard it from others that have a distribution network that in some areas there's too much inventory in the channel and it needs to correct. This is true for us in both tantalum MnO2 and certain commercial chips in our ceramic product line. However, as I mentioned in the press release this morning, polymer tantalum is now our leading revenue producer in our tantalum product lines representing approximately 70% and MnO2 currently hovering around 15%.

At KEMET, the turns of our polymer product and distribution is still around a healthy four times or only three months in inventory. We're running approximately 92% of our capacity in polymer. And in ceramics, we're still running at 100%, focused on serving our OEM customers that continue to be short, certain case sizes and working with distribution to manage POS and inventories.

Regarding cellphones, you should already know that we do not sell ceramics into the cellphone market. The significant revenue decline you read about the small case size producer is not our model. The market remains tight where we focus and we are still committed to adding the capacity in our ceramics business as we have previously disclosed. Based on our capacity at the end of fiscal '19, the year we finished this past March, we will add the capability to produce approximately 46% more pieces between now and the end of fiscal year 2022. And remember, we have more or less presold 33% of that future capacity with our three customer capacity agreements.

I'll talk more about the solid capacity business group in a few minutes. But first, I'll turn the call back to Greg to let him talk about the financials.

Gregory C. Thompson -- Executive Vice President and Chief Financial Officer

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. I will start my review on slide four and five of the webcast slides. Revenue for this quarter was up 5.4% to $345.2 million, compared to Q1 last year, driven by strong growth in ceramics, in particular. GAAP net income was $40.3 million versus $35.2 million last year, an increase of 14.5%. Non-GAAP adjusted net income was $48.2 million in the current quarter versus $32.3 million in the first quarter last year, an increase of 49.2%.

GAAP gross margin was up significantly compared to last year's first quarter by 630 basis points from 28.9% to 35.2% due to top line growth and continuing operational efficiencies in the Solid Capacitor segment. Non-GAAP gross margin came in at 35.5%, up 70 basis points from last quarter and up 610 basis points from a year ago. GAAP diluted EPS was $0.68 per share compared to $0.60 for the first quarter of last year. Non-GAAP diluted EPS was $0.82, up approximately $0.50 -- 50% compared to $0.55 in the first quarter last year. Our adjusted EBITDA for the quarter was up 47% to $82.6 million from $56.2 million in the first quarter last year.

Now on slide six, the last 12 months adjusted EBITDA margins have steadily increased over the last two fiscal years from 13.9% at March 31, 2017 to 22.6% for the period ending June 30, 2019. Last earnings call, we discussed the structural changes that we have made over the last few years in terms of segmenting the ceramics product line to focus on value-added applications with a design-in focus, vertically integrating the tantalum business to improve costs and also focus on the newer polymer technology and finally acquiring TOKIN to expand our offering and strengthen our balance sheet. This quarter's results highlight the fact that these structural changes make us a different company today than we were several years ago as we demonstrate continuing strong, sustainable performance in spite of some softening in certain markets.

Non-GAAP SG&A expenses came in below our forecast at $42.4 million or 12.3% of revenue compared to Q1 last year of $42.2 million or 12.9%. We continue to tightly manage our SG&A expenses. Non-GAAP income taxes were $18.4 million at an effective tax rate of 27.6%, which was within our forecasted range compared to Q1 last year of $4.1 million at an effective tax rate of 11.4%.

As you recall in the fourth quarter of last year, we recorded a tax benefit of $50 million due to the release of the net operating loss valuation allowance in the US and a partial release of a similar valuation allowance in Japan. This resulted in a significant onetime benefit to our GAAP results last year from the realization of the benefits from these net operating loss carryforwards. This onetime benefit is due to the significant improvements in our profitability along with our forecast for continuing strong profitability going forward. The recognition of this tax benefit in the last fiscal year 2019 also has resulted in the higher effective tax rate for this quarter and will continue in future quarters for both GAAP and our non-GAAP results.

Turning now to slide seven, capital expenditures during the quarter were $37.1 million compared to $68.4 million in the prior quarter. This coming quarter, we expect to spend in the range of $45 million to $55 million for capital expenditures, as we continue our planned capacity expansion focused toward ceramics and tantalum polymer to support future customer demand, along with investments in our IT infrastructure around the globe.

As stated in the last earnings call, we expect capital expenditures for the full-year ending March 30, 2020 to be in the $120 million to $135 million range, excluding approximately $45 million to $50 million of customer-funded capacity expansion related to the customer capacity agreements. We previously disclosed these capacity agreements with three separate customers, whereby one-third of our expanded ceramics capacity once completed in fiscal year '21 will be in effect presold to these three customers.

Net inventories increased $15 million this quarter to $256.1 million, representing approximately four turns a year. This increase is due to some opportunistic raw material purchases in our tantalum product line, ceramics work in process to support future demand and planned inventory increases in our film and electrolytic product line as we exit the Swedish plant in Granna and consolidate all electrolytics production into one existing plant in Portugal.

Cash on hand was $217.3 million. During the quarter, we paid $12.1 million for TOKIN-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 TOKIN acquisition in fiscal 2018, we are 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 underlevered 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.

William M. Lowe -- Chief Executive Officer

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 looking at the two separate Solid Capacitor business group 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 increased in each channel and increased 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 MLCCs. Our focused segments led the growth, including 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 MnO2 products with MnO2 declining approximately $12.1 million, but polymer and specialty products increasing $10.2 million for the same period, driven by the continued design-in 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 tantalum 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 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 MLCCs and favorable manufacturing performance, as a result of the continuing focus on recurring cost-out initiatives and yield improvements and adjusting our direct manufacturing costs in our MnO2 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. Revenues 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 Granna 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 flex suppression sheets, primarily related to a slowdown in the smartphone market. We are experiencing a continued slowdown in demand for piezo actuator products using 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 wire business for the medical catheter guidewire market. Additionally, we continue to see growth of the distribution channel as we develop new products and place more products in the channel to position and grow our MSA longtail business. I'm very excited about the pipeline of projects we have for future periods as we expand MSA's reach beyond Japan. A repositioning of their quality products outside of Japan will grow the top line of this business, as well as increase 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 to soften 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 was still low in China amid the trade dispute with the US and the Manufacturing PMI readings have been declining since March. As the supply chain stabilized and lead time shortened, our distribution partners are continuing to correct their inventory and we believe it will take at least another two quarters to complete. This is primarily affecting us in the MnO2 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 in some of our product lines and turns are 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 it and working to balance those distributors that still need more product, where the statistics indicate they have a need. In the MnO2 space, where we have seen and will see the most impact this year, we moved to get ahead of the curve a few months ago by adjusting our direct labor manufacturing cost, reducing manpower in 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 at 0.71.

Before I turn the call back to Greg for our forecast, let me offer some commentary on our industry sectors and our pipeline of new products. A softening macroeconomic environment has triggered the slowdown in the automotive segment in all regions, with significant contractions virtually in every market. We forecast global light vehicle sales to slow down and in fact, contract over approximately 6% year-on-year. In the long run, electronic and components though, 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 MSA 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 AEC-Q200 qualified for automotive applications. This product will be part of our MSA business group. This is perhaps the most biggest and most exciting product launch KEMET has done since the acquisition of TOKIN and it well underlines the synergies between the two companies. The usage of automotive-grade inductors has been experiencing significant growth over the last few years and is expected to continue driving -- be driven by the electrification of the transportation industry.

With the METCOM line, KEMET is well positioned to generate incremental revenues, leveraging our current go-to-market strategy, customer base and distribution channel. Our materials science expertise on ferrite material will also allow us to stay ahead of the technology roadmap. Our goal is to be recognized in this space as 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 in other major economies are positive forces to maintain growth in this segment in the low single digits. The industrial segment open pipeline of projects is a close second, right after the automotive one for KEMET.

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 KEMET product roadmaps are well aligned to such needs. Film and Electrolytic has a healthy and solid list of projects linked to the Industry 4.0, as well as various solar and wind platforms, confirming our leading position in such sectors for many years.

On the MSA side, on top of our core presence in the Japan and Korea market, we are now expanding design win stories in other regions and in particular in the United States with our Sensors products. Thermal, current and piezo sensors are making significant inroads in several key accounts in The States in industrial automation and machinery equipment applications. In telecom, we observed a general slowdown of 5G roll out infrastructure, although overall 5G-related investment continues to gain momentum. We remain focused on the design-in efforts as we expand our product offering into 5G solutions from polymer and ceramic, now into film products used for filtering and power conversion functions.

In cloud and computing applications, we have a leading position with our Solid Capacitor product lineup. After over two years of growth, unit shipments of servers declined year-on-year in line with reduced CapEx spending. This decline was expected as data center providers work through excess inventory. The market is expected to recover for the remainder of this year and finish with single-digit growth versus last year. PCs have rebounded this year and the tablet market grew significantly due to the product refreshes by major brands.

Our road map for tantalum polymer continues to accelerate our presence in the SSD and Edge computing segments, both of which are still experiencing growth.

KEMET connect technology, a patented package 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. It's 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 confirm 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 in continues to grow, encompassing all the main systems like satellites, radar and 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. Greg?

Gregory C. Thompson -- Executive Vice President and Chief Financial Officer

Thank you, Bill. Turning to our outlook, we expect our second quarter sales to be in the range of $320 million to $330 million, down approximately 5.5% to 8.4% from last year's second quarter. The lower revenue number reflects the distribution channel correction which Bill just discussed. That said, we believe our gross margin 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. SG&A expenses should be $43 million to $45 million. And R&D expenses in the range of $12.5 million to $13.5 million. Our global effective tax rate will continue to be at the same level around 25% to 28%.

Now I'll turn the call back to Bill for some final remarks.

William M. Lowe -- Chief Executive Officer

Thanks, Greg. I want to end with saying that what I see from our new products lineup makes me very excited about the future for KEMET. We remain closely engaged with key transformative segments that will drive growth in the electronic components over the next decade. We have several examples of wins, but I want to provide just one example of the electrification within the transportation industry in which we're 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 it wirelessly via minimal magnetic infrastructure, which is placed underneath the driving lane. The KEMET 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 and a test phase very soon in a couple of European cities. These systems will charge the vehicle while it is moving on the roadway. It's another way that KEMET 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 who develop these new technologies and produce or support our quality products.

Operator, we'll now take questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Matt Sheerin from Stifel. Your line is open.

Matt Sheerin -- Stifel -- Analyst

Yes. Thanks. Good morning. First question, Bill, just regarding the gross margin and holding up despite revenue coming down, and it sounds like there's some cost measures you took, particularly in MnO2 and F&E, but what about the pricing environment? Is that helping you on the MLCC? I know that you had some price increases kick in at the beginning of the year? And what's the pricing environment like in the tantalum space?

William M. Lowe -- Chief Executive Officer

Well, Matt, most of our -- as we mentioned in our previous calls, most of our pricing at least certainly for our OEM contracts are negotiated in the fall and they go into effect primarily in the first calendar quarter of the year. So for the -- by and large for half of our business which is OEM related, those prices came in, in that first calendar quarter. And they're under contract and 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, high CV pricing is stable. There is some certainly in the commercial, when you get into 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 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 MnO2 has declined, we have focused on growing polymer. And with that mix, 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 MnO2 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 and the September quarter from MnO2.

Matt Sheerin -- Stifel -- Analyst

Okay, that's helpful. And then if you look at the -- in the MLCC space where you play in the high case size, high capacitance area where 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 and is that part of the backlog that you're seeing?

William M. Lowe -- Chief Executive Officer

Yeah. I mean, certainly, it's contributing to 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 that's taken it out over time because it would make the situation I think with customers extremely difficult because the rest of us, not just KEMET, but others that are still making those case sizes would have the difficulty filling the gap immediately. As 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 manufacturers.

So yeah, it's still tight, they are still from what we hear and see, continuing to save and continue to extract themselves from some case sizes. They've spread out the time frame, they've moved back some of the drop-dead date, if you will of when they will completely stop making those. So I think that's actually as I said, I think that's a positive. It's going to keep it tight for a while 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 then I think it's probably the same for our competitors who are all buying the equipment from what I understand from virtually the same manufacturers in Japan.

Matt Sheerin -- Stifel -- Analyst

Okay, great. And just lastly for me, just regarding the F&E business, you talked about some content drivers there, but that business has been a 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 does the management team and the Board looking at in terms of what that business may or should look like in the next few years?

William M. Lowe -- Chief Executive Officer

Well, we have our internal targets, Matt, to drive that business. And of course, like any business, we continue to evaluate what our options are, whether that's continue to drive top line or to look and see whether or not there's another alternative that's required for that business and for the rest of the company. So we're -- it's under continued evaluation and there is a big pipeline there. I mean, it's -- things 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, 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 a 6.1% gross margin is not acceptable and it's too low.

Matt Sheerin -- Stifel -- Analyst

Okay. All right. Thanks so much.

William M. Lowe -- Chief Executive Officer

Thanks, Matt.

Operator

Our next question comes from the line of Craig Ellis from B. Riley FBR. Your line is open.

Craig Andrew Ellis -- B. Riley FBR, Inc. -- Analyst

Yes. Thanks for taking the question and congratulations on the good execution, gentlemen. Bill, I wanted to follow-up with a question on gross margin as it relates to costs and cost reduction. So it's clear the company saw some slowness coming in parts of this business and worked proactively to make some cost moves. The question is, if we have a modeling macro going forward as we have now, what are some of the other things the company can do on the cost reduction side to help protect gross margins where they stand now?

William M. Lowe -- Chief Executive Officer

You know there's always that -- first, we do look at our direct costs 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 cost, somewhere around the maybe a 19% to 20% kind of level. So we want to make sure that we flex as best we can our direct costs, which are the majority of our costs in our manufacturing facilities. I think we -- from a -- from other than that, I don't think we're in a position -- we don't see we're in a position at this point where we need to take any drastic actions in overall fixed costs for the company on a global basis at this point.

I think it's our -- our product mix somewhat, as I said, somewhat -- we're not immune to this, we'll see some declines because of distribution channel and some softening in the automotive. But keep in mind that from an automotive -- 65% of our ceramics business or so is automotive and we're still running full there, still trying to make sure we can serve the demand for the automotive, which is short. It's been -- it's a little -- the dynamics are different because while the automotive units are declining, there's the shortage that's been created in large case size, it's needed in automotive and that's where our focus is.

So we're a little bit different than some of our others as you might look at to compare us to because that's where our focus is and they're 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 this shortage, 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 the to your point, overall global slowing kind of across the board. So I think our general mix of -- in Solid Capacitor business group is really -- is holding up well.

Gregory C. Thompson -- Executive Vice President and Chief Financial Officer

Craig, I'll just add to that. So, we did call out the -- in Film and Electrolytics, the consolidation of Granna into Portugal, so that movement is under way 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 in Film and Electrolytics and other activities kind of like that in Film and Electrolytics and -- as well as in MSA that we're working on to improve the performance of both of those two segments.

Craig Andrew Ellis -- B. Riley FBR, Inc. -- Analyst

That's very helpful color, gentlemen. The second question is on the revenue guidance. So it's clear that the company sees continued strength in its OEM business and with guidance you're making an adjustment for some of the softness that you see in distribution. The question is, based on what you see in distribution, does the guidance incorporate getting inventory levels and the distribution adjustment complete in the quarter or should we expect that there would be a further adjustment in December and potentially subsequent quarters for the trends you're seeing in the channel?

William M. Lowe -- Chief Executive Officer

Well, without forecasting actual revenue number for the third quarter -- third fiscal quarter, I would say, 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 top line. I think we wait a little longer and get into this quarter, but I think we believe we're -- we'll 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 in two out of three regions and it's actually reasonable in the third region.

So they're a little short -- they're still turning fast and so it's a matter of where we direct our sales. And so we are trying to -- as I mentioned, we're trying to manage getting components to them, to those distributors who still need it based upon the statistics of how fast they're turning their inventory. So I think that was -- that's 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 won't know because we won't see a -- I think initially first coming into this calendar year, there was a lot of talk about the second half of the year would be back when things will return and then go back up. I'm 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.

Craig Andrew Ellis -- B. Riley FBR, Inc. -- Analyst

That's very helpful color. Thanks for that, Bill. And then lastly, it was a quarter ago when the company set forth a longer-term target financial model. And there's an inorganic growth component to that model, the question is, as you continue to make investments in your IT 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?

William M. Lowe -- Chief Executive Officer

Yeah, I don't think I'll talk about size, but I think we haven't changed our view of what our long-term view and that was a five year view on what we've put out. We are putting -- getting our infrastructure put in place, specifically in the IT area by getting on one platform and on a type of platform where it is easier for us to, I'll use the term plug-and-play, to be able to plug-in an acquisition into our systems easier and faster than we might have done with TOKIN. So we're positioning ourselves to be able to do that. It is a longer-term view, so we are working on directionally where that's going to take us and when we're prepared to or in a position to discuss that with everyone, we'll certainly do that.

Craig Andrew Ellis -- B. Riley FBR, Inc. -- Analyst

Thank you very much and good luck.

William M. Lowe -- Chief Executive Officer

Thank you.

Gregory C. Thompson -- Executive Vice President and Chief Financial Officer

Thanks, Craig.

Operator

[Operator Instructions] Our next question comes from the line of Maynard Um from Macquarie. Your line is open.

Maynard Joseph Um -- Macquarie Research -- Analyst

Hi. Good morning. Thanks for taking the questions. I just want to make sure I'm completely clear on the distribution inventory, if large case size automotive ceramics are in shortage and running at 100% utilization, I guess, why is there distribution channel destocking or are you talking about other products in the distribution channel?

William M. Lowe -- Chief Executive Officer

Yeah, let's put large case high CV aside, let's talk MnO2 and then commercial, we'll say, lower -- the low CV, lower capacitance, commercial, smaller case, but still even in the large case size, but a commercial chip, that's non-automotive grade, non-military, aerospace, et cetera. There is a buildup of inventory there. So those are chips that can be used in a variety of applications that are not -- doesn't require automotive grade, et cetera and it's not high CV.

So there is a buildup there that we're working through. And I mentioned I think it was to Matt on the -- there is some price pressure for those. We've baked that into our forecasts we put out today. And then MnO2 is specifically built up, we believe it built up because when everything was short last year, there were a number of distributors who built up MnO2 inventory I think under the theory that some may want to switch to MnO2 where they can, where there is a crossover and they could use MnO2 versus a small case size ceramics.

And that -- after they did that, of course, the market softened and they ended up with quite a bit of MnO2 on hand. And that's what's going to take a couple of quarters in the MnO2 segment to work off as the inventory they got built up. And then on top of that, the market behind that in the MnO2 space is also soft. So that's why for us, you noticed in the comments on the tantalum product line that the tantalum and MnO2 product line was down about $12 million for the quarter.

So that's what's driving the inventory changes there. But as far as high CV, we're still -- that 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 there's still some lead time because of the backlog and the current requirements we're still running at 100% for that.

Maynard Joseph Um -- Macquarie Research -- Analyst

Great. And can you just remind me, in terms of fiscal '19, what your TOKIN related fines and cash outflow was?

Gregory C. Thompson -- Executive Vice President and Chief Financial Officer

Let's see, it was in the $40 million range, Maynard. I don't have that specific number right at my fingertips, but it was in that $40 million, $45 million range.

Maynard Joseph Um -- Macquarie Research -- Analyst

Okay. And specific to capital allocation program, I'm just wondering kind of where you are in the process in terms of thinking about other uses of capital, share repurchases and any plans to increase the dividends?

William M. Lowe -- Chief Executive Officer

Thanks. Good question. Well, of course, we just -- from a dividend perspective, we just instituted our dividend last November. So that's early in the process, but certainly -- and of course, you start at a level where you allow yourself to be able to do increases. And I think long-term, certainly the company will. And regarding share repurchase, that's a continuing dialogue at the Board level. The Board has requested management to basically provide them data with a study of the -- 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 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 purchase program.

Maynard Joseph Um -- Macquarie Research -- Analyst

Okay, great. I'll get back in the queue. Thanks, guys.

Operator

[Operator Instructions] And there are no further...

William M. Lowe -- Chief Executive Officer

Well, operator?

Operator

...questions at this time. Please continue.

William M. Lowe -- Chief Executive Officer

Okay. All right. Thank you. Well, if there's no further questions, then. Thanks everyone for attending our conference call today and your interest in KEMET. And we'll talk to you again next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Richard J. Vatinelle -- Vice President and Treasurer

William M. Lowe -- Chief Executive Officer

Gregory C. Thompson -- Executive Vice President and Chief Financial Officer

Matt Sheerin -- Stifel -- Analyst

Craig Andrew Ellis -- B. Riley FBR, Inc. -- Analyst

Maynard Joseph Um -- Macquarie Research -- Analyst

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