Q3 2021 Kimball Electronics Inc Earnings Call

May 6, 2021

[music].

Good morning, ladies and gentlemen, welcome to the Kimball electronics third quarter fiscal 2021 earnings conference call. My name is Cindy and I will be the facilitator for today's call. All lines have been placed in a listen only mode to prevent any background noise.

After the completion of the prepared remarks from the Kimball electronics leadership team there will be a question and answer period to ask a question simply press Star then the number one on your telephone keypad questions will be taken in the order that they are received.

Today's call May the sixth 2021 is being recorded a replay of the call will be available on the Investor Relations page of the Kimball electronics website. At this time I would like to turn the call over to Andy <unk> head of Investor Relations. Mr. <unk> you may begin.

Thank you Sandy and good morning, everyone. My name is Andy <unk> and I recently joined Kimball electronics as the head of Investor Relations.

I'd like to welcome you to our third quarter Conference call with me here today is Don Charron, our chairman and CEO, Mike Circus, scatter, Vice President and Chief Financial Officer, and Janet <unk>, Vice President Finance.

We issued a press release yesterday afternoon with the results of our third quarter ended March 31 2021.

To accompany todays call a presentation summarizing the financial results has been posted to the Investor Relations page on our company website within the events and presentations tab.

Or if you are listening via the webcast you can follow along by advancing the slides or download them from the downloads tab on the webcast portal.

Before we get started I'd like to remind you that on today's call. We will be making forward looking statements that involve risks and uncertainty and are subject to our safe Harbor provision just stated in our press release and SEC filings and that actual results can differ materially from forward looking statements. All commentary today is focused on non-GAAP results for the third quarter of fiscal 2002.

'twenty one this excludes one time after tax benefits amounting to zero point $5 million or <unk> <unk> per diluted share associated with non operating items reconciliations of GAAP to non-GAAP amounts are available in our press release.

This morning, Dan will start the call with a few opening comments, Mike will review the financial results for the quarter and Don will complete our prepared remarks before taking your questions I'll now turn the call over to Don.

Thanks, Andy and good morning, everyone.

I'm very pleased with our results for the third quarter.

Our team remains resilient in the face of many ongoing challenges around the world, including the COVID-19, pandemic and the global shortage of semiconductors.

Despite these headwinds we delivered solid top line growth with very good results across multiple end market verticals and our adjusted EPS in the quarter was up 56% compared to Q3 last year.

In addition, the operating margin rate once again exceeded our goal of four 5% and we generated strong cash flow from operations for the fourth consecutive quarter.

On a year to date basis, our cash flow from operations has more than doubled from the prior year.

Due to the global shortage of semiconductor is a significant amount of our shippable backlog shifted out of Q3, and Q4 of fiscal year 2021 and into the first half of fiscal year 2022.

Many industry experts are forecasting at this semiconductor shortage will remain with us for most of this calendar year.

Our materials teams around the world have been working day and night to find solutions to overcome this shortage.

Based on the semiconductor delivery commitments that we currently have from our suppliers. We are still expecting a very strong fourth quarter of fiscal year 2021, both sequentially and year over year.

Beyond these excellent results, we have never lost sight of the fact that the health and safety of our employees remains our number one priority and we continue to make every effort to keep our facilities safe.

The number of employees testing positive for COVID-19 has remained at a low level minimizing disruptions and allowing us to continue to deliver on our promises to our customers, which was evident in our top line results for the third quarter and year to date fiscal year 2021.

Yeah.

Net sales increased 6% compared to the same period last year and while foreign currency did have a favorable favorable impact the growth was solid even after adjusting for FX.

Strong sales increases were posted in our automotive industrial and public safety.

Verticals.

Automotive sales were up 12% in Q3 from a year ago with the strength, resulting from ramp up of certain programs, including fully electric vehicles.

Lower volumes in the third quarter last year, which began to see the impact of COVID-19, and favorable foreign exchange rates.

An example of the programs with electric vehicles includes electronic power steering systems. It's an application an architecture that is largely the same for both electric vehicles and vehicles driven by internal combustion engines or hybrid.

This is an area, where we continue to invest to keep pace with expected future growth as the popularity of electric vehicles rises.

There are other applications that are similar in terms of approach and focus and we have been successful in winning additional programs.

We have strong relationships with several customers that support many of the most popular brands in the world and we expect these relationships to fuel growth in this for.

In this vertical market in the years to come.

On a sequential basis sales in automotive were down 8% from last quarter, an outcome from the global semiconductor shortage.

While dependent on our ability to overcome the component shortages, we expect sales to continue to be strong into fiscal year 2022.

The medical end market vertical was down 2% in Q3 as a result of strong prior year sales related to the COVID-19, global pandemic and reduced electric procedures also due to the ongoing global pandemic we.

We expect this decline to be short lived as more of the population is vaccinated and physicians offices and hospitals resume electric procedures and activities.

Shifting now to the industrial vertical sales increased 5% in the third quarter compared to the same period last year with the strength, resulting from automation test and inspection sales higher end market demand for climate control products for instance, HVAC applications in the U S.

And favorable FX.

We offset by decreased demand for smart metering products.

We expect a strong fourth quarter in the industrial vertical driven by orders for machines scheduled to be shipped by Ges.

And finally sales in public safety, we're $13 5 million, an increase of 9% driven by the ramp up of new programs.

As I alluded to on our second quarter call. We have received board approval for another critical expansion of our global footprint, we plan to invest approximately $25 million to $30 million on the expansion, which will double the size of our footprint in Mexico.

We expect to break ground over the summer with completion within approximately 12 months.

This combined with our Thailand expansion as a continued demonstration of our strong market positioning and growth opportunity for the future.

And finally I am so proud of our team on the effort to deal with the challenges caused by the pandemic and the global semiconductor shortage.

In April we were honored by achieving the highest overall customer rating.

In circuit Assemblies, 2021 service Excellence Awards.

Consistency in anonymous surveys such as this speaks volumes about our customer service culture. So I'd like to point out that this is the third time and for years that we have been recognized for this award.

Circuits Assembly as a leading industry publication covering the mixed technology Electronics Assembly marketplace and recognizes companies that received the highest customer service ratings as judged by their own customers.

The awards were presented to outstanding electronics manufacturing services providers in the categories of quality dependability timely delivery responsiveness value for price and technology and we were recognized for achieving the highest overall customer rating and all five service categories for EMS.

Companies with annual sales over $500 million.

This is a great example of how our strong company culture and core values are helping us get through this together.

Now I'll turn it over to Mike to discuss our third quarter results in more detail.

Mike Thanks, Don and good morning, everyone. During my comments I will be referring to the slide deck Andy mentioned during his opening comments.

As Don mentioned and depicted on slide three third quarter net sales were $310 3 million or.

A 6% increase compared to net sales of $293 $9 million in Q3 last year.

Foreign exchange rates favorably impacted sales by 3% in the third quarter.

The breakdown of sales by vertical market as described by Dan as summarized on slide four.

Our gross margin rate in the third quarter reflected on slide five was eight 4% a 150 basis point increase from the third quarter of last year.

The gross margin improvement was driven by improved operating execution favorable product mix within our automotive vertical market.

A shift to more mature on larger programs and favorable foreign currency rates, partially offset by higher profit sharing bonus expense.

Adjusted selling and administrative expenses were $11 $6 million in the third quarter up $1 million or 10 basis points when measured as a percentage of sales compared to the third quarter last year.

This increase was primarily driven by higher profit sharing bonuses higher salary and payroll related costs.

As a reminder, adjusted selling and administrative expenses excludes changes in the fair value of our surf liabilities, which is directly offset in other income and expense from changes in the fair value of the serp investments.

Adjusted operating income for the third quarter was $14 $4 million or for 6% of net sales.

As shown on slide seven in the deck.

This represents an improvement from $9 7 million or three 3% of net sales in the same period, a year ago, primarily driven by the increase in gross profit for that I just mentioned.

Other income and expense was an expense of $600000 in the third quarter, which compares to expense of $1 9 million in the third quarter of fiscal year 2020.

<unk> expenses in Q3 of this year includes $600000 in net foreign currency losses, and $300000 of net interest expense, partially offset by $200000 in gains on certain investments.

The expansion in the third quarter last year includes $1 1 million of net interest expense $900000 in losses on the surf investments and $200000 in net foreign currency gains.

The effective tax rate for the current year third quarter was approximately 25% in the prior year third quarter. The effective tax rate was approximately 28%.

Slide eight reflects our adjusted net income trend in the third quarter of fiscal year 2021, adjusted net income was $9 9 million compared to net income of $6 $3 million in the third quarter of fiscal year 2020.

Adjusted diluted earnings per share were <unk> 39 in the third quarter. This compares to diluted earnings per share of <unk> 25 reported for the same quarter last year.

Now turning to the balance sheet cash and cash equivalents at March 31, 2021 were $89 $7 million on.

Operating cash flow trends are shown on slide 11.

Our cash flow provided by operating activities during the fiscal third quarter was $31 $5 million driven by net income plus noncash depreciation and amortization and changes in working capital.

In the prior year third quarter operating activities provided $12 million of cash.

Our cash conversion days for the quarter ended March 31, 2021 were 66 days down from 81 days in the quarter ended March 31, 2020, and down from 75 days in the second quarter of fiscal year 2021.

Compared to the second quarter of fiscal year 2021, we saw improvement in each of our day sales outstanding contract asset days production day supply on hand, and accounts payable days.

Slide 12 reflects our capital and depreciation trends the capital investments in the third quarter of $8 $7 million were largely to support launch and ramp up of new programs and to replace older machinery and equipment.

We continue to study our capacity needs to support growth plans.

Our board approved plan to expand our Thailand operations was officially kicked off last quarter and to plan to expand our Mexico operation was approved this quarter.

Both expansions add much needed capacity to support the forecasted growth from both existing and future customers and demonstrate our strong organic growth opportunities.

Borrowings on our credit facilities at March 31, 2021 for $65 million, which is down $25 6 million from December 31, 2020, and $57 6 million from June 32020.

Our short term liquidity available represented as cash and cash equivalents plus the unused amount of our credit facilities totaled $226 million at March 31 2021.

There were no shares repurchased in the third quarter of fiscal year 2021. Since October 2015 under our board authorized share repurchase program. A total of $79 $7 million was returned to our shareowners by purchasing five 3 million shares of our stock.

In conclusion on our financial condition continues to be strong and we're in excellent position to take advantage of growth opportunities and improve operating margins and return on invested capital while being able to confront that continued uncertainties caused by the COVID-19 pandemic and the global semiconductor shortage.

I'll now turn the call back over to Don.

Thanks, Mike before.

Before we open the lines for questions I'd like to make a few closing comments for.

First I need to reiterate how proud I am of our people around the world.

We have made the health and safety of our employees our number one priority all while continuing to deliver on our promises to our customers.

The company is in a solid position and we are committed to build success in the future.

Finally, as previously announced it is with mixed emotions, we say farewell to Mike our friend and colleague Mike has been a trusted partner for decades, and his leadership and in depth knowledge of our business will be sorely missed.

On behalf of our board of directors and the entire company I want to extend our sincere gratitude and appreciation to Mike for his dedication and service.

We wish you the very best you will always be a valued member of the Kimball electronics family.

I also want to congratulate Jana on her new role as CFO.

We are fortunate to have a leader of Janus caliber ready to assume the range for this key position.

Her experience in financial management strategy and operations make her an ideal fit to move our organic organization forward.

<unk> would you like to say a few words.

Thanks, Don and very excited about the opportunity to take over from Mike.

Kimball electronics has a distinguished history, a talented team and a promising future with a strong company culture, and our purpose, creating quality for line.

I look forward to working alongside you and the other members of the leadership team to drive growth and enhance shareholder value.

Thanks, Jan on looking forward to it too with that I would like to open the lines for questions.

Cindy do we have any analysts with questions in the queue.

Ladies and gentlemen analysts may ask a question at this time by simply pressing star one on your dial pad you may remove yourself from the queue by pressing star too on your dial pad we asked.

If you are using a speakerphone you.

You pick up your handset before asking your question and one moment. Please for the first question.

And your first question comes from Anja Soderstrom with Sidoti.

Hi, everyone and congratulations on a good quarter amidst the challenging backdrop and my first question will be on the index segment than debt.

Can you just elaborate a little bit on how that's been trending.

And also maybe talk a little bit about the competitive landscape for Ges.

Sure on yet.

First of all I want to just remind you that we do have a degree of seasonality in our ges business and so.

And that seasonality typically.

<unk> strongest quarter has been queue for now we've just on the company just short of three years silver, we're learning more and more each and every quarter as we go but we do have a degree of seasonality there and our fourth quarter of our fiscal year as Ges is strongest quarter.

Overall.

Also if you look at what.

Net customers we serve.

With Ges is services.

They're primarily in the manufacturing of smart mobile devices.

And semiconductor industry. So those are the types of industries that are machines that we develop design and manufacture they serve those needs. If you will in the market.

And when you look at the spending the capital spending.

Trending in those areas it's.

It's quite strong now.

It's focused in the smart mobile device area, and we're really happy with where we have content and relationships there because those customers are doing well in the end market in that in their perspective.

End market.

The semiconductor industry as you know is adding capacity at a pretty rapid pace right now given the shortages and just the fact that demand has far outpaced supply here.

During this period and so capacity is being added and we hope to be able to gain traction and grow their <expletive> as those capital decisions capital deployment decisions are made within the semiconductor space.

We are we are actively pursuing a diversification strategy because the technology that we have in one there at ges.

Especially in areas like optical inspection of really critical dimensions.

That technology is used in many different manufacturing environments supporting many different end market vertical so.

We have a diversification strategy its active there and we hope to.

To continue to grow that business, but right now it's strong and it's trending upward in those two areas I mentioned smart mobile device manufacturers and semiconductor.

Okay. Thank you and then in the <unk>.

Oh Ash segment.

It seems like you said the backlog is going to spill into the fiscal 2020, but you still have them.

<unk> ability for the fourth quarter, and say you have to apply to Singapore.

Can you just talk about the dynamics day and.

Our strong first quarter it looked like Dara and you have a pretty easy compare year over year.

But a little bit tougher sequentially.

Yes.

I'll just preface what I'll say there on your in the fact that we have commitments from suppliers for deliveries and we've we're factoring that into our production plans every day as we speak.

The biggest risk we face is if a supplier decommit, meaning that they gave us the delivery schedule.

And they couldnt immediate themselves for their own reasons and so that's the biggest risk we face but that being said when you look at the commitments we have.

Those commitments would support a strong fourth quarter for us.

And plus as we mentioned in script today GE the Ges machines in order for machines from Ges will also be.

<unk> contributor to the quarter, but becoming specific specifically back to automotive yes. We are looking at the commitments, we have from suppliers and we're factoring those into.

What we think our production and sales will be in the quarter and that's why we believe we're going to have a strong fourth quarter. I also would just say that day that demand that it shifted out it did not cancel I just want to emphasize that it shifted out and so.

We can see.

Our strong start to the fiscal year 'twenty, two especially in automotive because of that demand is shifting out ahead of us and there are several areas. We can look to that will support that demand staying strong such as inventory of vehicles in the U S being at or below all time.

Lows and demand being quite high of buyers in the market. So.

That should prove to be very favorable for our automotive end market vertical and especially as just a component shortage starts to subside I am confident in our ability to execute on the manufacturing side once one for semiconductor short each subsides.

Yes.

Okay. That's.

Good color then and what are you seeing there in terms of the lettuce returning.

Yes, still still a flow pace on that as you know we had the favorable impact of building. The COVID-19 gear when the demand was there for COVID-19 patient care.

<unk> built out its run its course.

But we still see areas of our medical end market vertical that are not yet back at pre COVID-19 run rates.

That's going to require people going to see their doctors again people feeling comfortable to go see their doctors people feeling comfortable to go to the hospital for elective procedures that business has not recovered and I think it's more difficult to predict but look I think we should all be encouraged by the vaccinations in the vaccination.

The rates that we're seeing across the U S.

Obviously, you have the rest of the world, we'd like to see keep pace as well.

That should help that should help.

And that'll be a nice increase of opportunity to increase our sales there on the medical vertical win when that does happen.

Okay. Thank you and in terms of debt.

Utilization and capacity expansion.

Hi.

Talking about Mexico, extending cycle now at why Mexico, and what are you primarily.

Producing in Mexico.

Yes, Mexico is a large facility for us today that one of the largest facilities. We operate in we've been there for decades, and it's a very popular preference of our customers. So.

And I guess to answer your question what do we make there we support all four verticals there in Mexico.

Very complex large scale manufacturing facility and.

And again sports all four of our end market verticals and we're at capacity we're at capacity.

We literally had no room left in that plant. So we waited as long as we could and we have opportunities in our new app, our new business opportunities pipeline that are very close to being awarded so.

That's how close I wanted you to know how close we take it before we make a decision to expand.

And the expansion decision is based on the popularity of that footprint to our customers in other words, that's their preference.

For various reasons.

That's their preference and that's where they'd like to see their product manufactured so we've following really following our customers with these expansions if you will.

It's really following their preferences, where they want us to build their products and what programs. They have in the pipeline that they want produced in Mexico and of course, as we announced last quarter Thailand.

Debt, we're following their preferences thats why those expansions are where they are.

Okay. Thank you and lastly.

But your cash.

Cash cycle days improvement you're talking at about six five days seems like on up there and sustainable and what's the put and takes there and then.

I guess that will support that.

On tinder improve cash flow if you can keep it at that level.

Yes, structurally when we do our analysis structurally.

We believe 65 days is where we should be operating on a on a pretty consistent basis.

In this environment with component shortages anytime you hear us say shippable backlog is pushing out because of a shortage issue as we talked about today.

That usually means some inventories coming in but the one part you need to build a unit is not and so.

We would expect to see.

Our <unk>, which is our inventory metric grow in this period.

It would be short term and we work it back down, but we do think it's sustainable and I wanted to explain the global semiconductor shortage. So that you would understand that.

With with this type of a shortage situation where customers want the product, it's shippable backlog, but its moving out because of the shortage.

Some of that inventory is going to come in and we will see a swelling a temporary swelling but.

As the management team working hard to keep keep our cash conversion cycle was 65 days and we haven't been there for various different reasons reasons. We've we've kind of had to battle to get there over the last few quarters.

<unk>.

We actually had excess inventory for example that we've been working down during this period in other areas of our business. So I would I.

I would want us to think about 65 days as a normal landing.

Pattern for us on the whole cash conversion cycle.

And what's your ability to take deposits for inventory that you need to hold.

That's not as prevalent in our customer relationships and commercial agreements.

But we have.

<unk>.

We will continue in the future.

Mechanisms to relieve inventory directly back to them if it for some reason is excess due to their forecast or due to their demand going away. So we do have some relief mechanisms in our commercial agreements, but deposits isn't one of them.

Okay.

Had it on if I just want to wish.

We wish Mike dwell on his new chapter and.

Congrats on the net gain on hand, you're at a position on the tough part will be working with you. Thank.

Thank you very much on it thank you.

Thank you on yet.

Yeah.

Your next question comes from Mike Morales of Wall Chasm and company Mr. Morale. Let's go ahead with your question.

Thank you operator, and good morning, Don Mike in Ghana.

Good to talk.

So let me get the important things out on the way first I'll Echo congratulations on your retirement, Mike It's been a real pleasure working with you over the years and best of luck on your future endeavors wherever that may take you on.

Likewise, congratulations Dan on the new role really excited to see what you can bring to the company.

Alright, let's get down to brass tacks now lots of good color and the answers there.

As I think about the commentary on the fourth quarter and the raw material shortages that everybody seems to be facing right now.

I think back to when we saw some production disruptions in the auto OEM space.

Last year and kind of the headwinds would that cause certainly on the news we are seeing a lot more of that.

Across Oems pretty much globally.

Is that kind of baked into your expectation for the fourth quarter based on where you're sitting today or just on.

On that qualitative commentary.

Those production or disruptions, even with Hudson's.

How severe they may be theres still a pathway to sequential growth.

We think so again, Mike I would just preface that with.

We're in this shortage, we've got commitments, we baked that into the Q4 outlook.

Commentary and.

So the risk we face that we have to manage the day commitments and and we're doing that as I mentioned on our teams around the world are working this thing day and night, but we're not in total charge of that.

As you can imagine with our supply base of the big names that I know you're familiar with and the fact that we're in there competing for those parts in many cases with a lot of different.

Say buyers that need that material, but in terms of the demand is very strong.

In terms of customers, taking everything we can build for example, very strong.

So if there is an opportunity to improve a shortage for example, and instead of the Decommit risk I gave you actually a supplier did better than they committed and delivered us more material. That's certainly could just as easily deliver upside more upside for us because the demand is.

Very strong.

For Us I think the big the big the Big Challenge is really.

To make sure that we don't get more day commence.

We have we have we have strong demand with existing.

Customers on existing programs, we've got new programs that are still ramping up.

And we've got all three of our geographies really pushing hard and I say, all three China, and North America and Europe.

And so yes, it's the demand is there we got to manage the <unk> and.

It should it should result in a very strong fourth quarter for us.

Understood.

And I think the auto industry has kind of found itself in a unique position right now of.

Having stepped out of line as it relates to picking up these semiconductor components and now they're at the back of the line on they can't cut to the from it and get what they need.

And as I think historically, that's a V.

Every new thing for the auto industry for the question is.

Discussions with any of your major customers, whether existing or prospective.

Change or evolve as they think about consistency of supply.

You had mentioned that the customer deposits on a huge part of the relationships now.

But do you see anything changing or are there ways that.

This shortage impacts the way that you guys do business from a.

Customer relationship standpoint, as it relates to supply.

Well first of all Mike you said that very well in terms of let's say automotive getting out of line and go into the back of the line and realizing they can't fight there were weighted.

Back to the front of the line, they're learning a lesson.

We have the opportunity to talk to our customers, which again are some of the largest tier one.

Companies.

In the world and so they deal with all these vehicle Oems.

There is a lesson being learned here by all that.

Should not have got out of line in the first place you would've had a more.

Comprehensive.

<unk> supply chain strategy to get through the pandemic and.

Yes, I think the lessons being learned.

I do think we will see changes in how.

Production schedules are fixed and set and fixed out further into the future versus sort of this idea that we somehow have this flexibility that all if we're wrong on and we've dropped our forecast and we dropped our demand and we're wrong and we want to quickly change it upward.

The laws of physics start to come into play in terms of how fast you can turn back on the supply, especially in the area of semiconductors. So there's lessons being learned I do think what we will see and what we have already required from our customers proactively and this goes back several months ago, Mike we were already asking our customers to place firm.

Orders on on.

On us or or forecast that were very firm out for a full year.

So that as we got back in line for.

This component supply we stayed in line we stayed in line with the right kind of forecast going out far enough and so it's going to take a little while to get through this but I definitely believe.

There is less there is a lesson being learned here.

Right right.

That's helpful.

Maybe switching to the Ges business and the positive commentary there.

We can't talk about the shortages and the challenges without talking about maybe the benefit that could bring for the ges business.

Can you help me understand what the sales cycle looks like for that business and is there some metric that you guys use to gauge the.

The health of the sales funnel there, whether it's like evaluation tool from the field or some other metric that you'd be willing to share and just.

Help me understand how prospective new business there.

Eloping.

Yes, we're learning.

There's things we want to do in that business it's exciting.

There is opportunities to apply this technology as I stated earlier in many different areas of our existing business and were users of the technology ourselves in our own manufacturing plant. So it's exciting it's a capital equipment model primarily today, we have services, we have revenue from services net revenue from software, but primarily the largest <unk>.

Other revenue was capital equipment, you would think that that the orders for that capital equipment will be placed far in advance just given the nature of it but it really is not that way at.

At least our experience so far it's not that way.

These are these.

These are machines that are worth.

Hundreds of thousands of dollars, but the debt.

The lead time is pretty short in terms of when we get that order and when that machine is expected to be built and shipped however, the development starts a lot a lot sooner and months if not years sooner.

In terms of the technology and the problem that technologies aimed to solve aimed at to solve and so so we are we are working on trying to develop.

Some better funnel metrics to communicate to more effectively communicate around this business as I said, it's a technology driven company.

And as technology, we in many cases one.

In terms of intellectual property.

So we're excited about the opportunities.

And the growth in your applications, but we're still learning and I Hope I hope soon we'll be able to talk more about the funnel metrics.

So that you can get an idea of what the outlook looks like and of course, our diversification strategy, we're hoping will help.

Really kind of soften that degree of seasonality that I.

I spoke about because we.

<unk>.

A very strong Q4s that we can report we have reported and of course, we've got a backlog number we're looking at for Q4. This year that is very strong, but we also have quarters that are pretty light and so we're working on that as well.

Got it got it that's really helpful color.

It's good to see the consistency on the financial results too as it relates to the margin targets that you guys have laid out, especially in a challenging environment. So good works folks.

As far as.

For those targets that you've put out there.

Are you guys reevaluating, where you're comfortable with the gross margin on the operating margin targets with now that we've got.

Three consecutive quarters under the belt and structural improvements in place that seem like they're going to stay on a post COVID-19 world.

Yeah, Great question, Mike and thank you for recognizing the three consecutive quarters.

Because we as management have been working on that for a long time to put some more consistency around that operating income margin target.

We have now hit it or exceeded it three quarters in a row and we're happy about that but we're not we're not satisfied.

Want to perform more consistent we wanted to get a few more quarters under our belt in terms of consistency.

Do we think there is a margin expansion opportunity. We do we do we think there's margin expansion opportunities beyond our current target, we're not ready to put numbers to it but we are working hard.

First step for this part of our journey is to put some consistency foot put more than three quarters together hitting.

Hitting our target but.

But I would want you to know that we as a management team believes there's margin expansion opportunities.

Fantastic Lastly from me I'll ask the question this way as you look at your.

Facility portfolio right now are there any other popular facilities with your customers that are near or at capacity.

Yes.

I don't know if you want more color Mike.

On the topic sure.

I would just I wouldn't want you to think about it this way we have.

Our new business opportunity pipeline is very healthy.

So our challenge is to look at our footprint and see where customers are wanting us to be.

And as we approach floor space capacity in these operations.

Good smart capital deployment decisions around expansion.

The other thing I would want you to know as we in this period, let's say over the next three years.

Our primary focus is going to be on expanding where we are so on in addition to where customers want us to be expanding where we are and why is that message important if you think back to the Romania Greenfield.

Those expenses are hitting your way beyond revenue and you are building a new team youre getting certified Youre getting qualified and <unk>.

You probably can remember all of the quarters, we talked about how much of a drag Romania was on our results.

It is a greenfield and now it's up and running and profitable et cetera.

When we book it.

Gaining are adding capacity to continue our growth in the future we're going to look at expanding where we are where we already have leadership teams in place we already have infrastructure in place and so we can we can manage our sync up the ramp up of expenses closer to revenue and we don't we don't see those ramp ups to be in.

As dilutive as long as say the Romania Greenfield was there's certainly it can't be perfect Youre always going to have some expenses that just ahead of revenue, but it's minimized in a model, where we're expanding where we are and so when I when I look at our footprint with Thailand and Mexico.

With those expansions were set for for several years.

I look at our growth in China and look at our growth in Europe, I know, we just did Romania, but our growth in Europe, and we look out into the future.

Those are some expansions that we could be talking about in the <unk>.

Not too distant future, but right now I think Thailand, and Mexico at least for the next couple of years I think that's going to be our primary focus and we've got new new business development plans too that are aimed right at those expansions.

And it would be fair to assume that all of these discussions would be done on a similar way to the way that you're approaching the Mexico expansion as it relates to prospective new business being on the cost to fill that expansion right. That's right. That's right, yes, its a kind of a field of dreams sort of analysis I don't know if you ever saw that movie that if you build it they will come.

And but we try to say what we'd like you to sign a little bit of a commitment to us before we build it before we put this baseball field in our current deal with an Io of it. It is a bit of that is a challenge for us is to try to to line that up the best we can but.

For customers really to commit business to a site. That's full if you put yourself in their shoes, that's pretty tough, especially on larger program. So we've got to find the right balance in there.

I think we did that in both the Thailand, and Mexico business cases.

And so now we're racing to get occupancy of those expansions and.

And get awarded those those programs from customers that basically.

Pushed us to do it.

Great I appreciate all the color for folks, it's great to touch basically well, okay. Mike. Thank you take care.

Your next question comes from.

Mindy Tucson Po with it.

Gabelli funds. Please go ahead, Mr. Shawn Poe.

And then first of all thank you Mike for all our interaction and you will be missed on.

The best for your retirement.

Thank you.

Oh, okay.

You share that Youre expecting.

Strength in Q4 sequentially and year over year, you said like very strong.

Is it reasonable to expect double digit on both can you quantify that.

First of all Hello, Hendi. Thank you for your question.

I can't quantify it with that type of precision handy, but for.

First of all the we know that.

The year over year comparison is somewhat of a soft comparison given given the Q4 number we had last year and so.

I think maybe.

Maybe that we set that one aside and just kind of look at the quarter. We finished just now at $310 million and say how much was that impacted by these material shortages.

How much material commitment do you have.

Yes, when we look at the quarter. We just finished in commenting that a significant amount of shippable backlog moved out ahead of us some of that is going to get recovered in Q4 as I mentioned there is a pretty good chunk of it that moved out to the first half of fiscal year 'twenty two but.

If I look at that $310 million, a quarter and said very strong yes.

It's a stronger growth rate than what we had in Q3 that we think will be able to achieve in.

But as far as on go with that handy and again I'd just reiterate the big risk we've got to manage their as Decommitments.

So.

We could walk out of this call today and go to a meeting and find out.

One of our major semiconductor suppliers.

Couldn't deliver what they committed to deliver for some for some reason.

I would caution you with that but in terms of the demand and the material commitments, we have right now.

Strong quarter.

And focused I would I would ask you to focus on the sequential part of that more than year over year comparison.

Yes.

If we focus on a sequential.

Hi.

I think overall, we are seeing a strong demand in automotive and then people are expecting strong demand and supply shock dates for the next several quarters.

And then and then if you look at your automotive sales in the last quarter like $140 million.

Being debt.

Is that can be a base line, while dealing with current demand in automotive and then short dates in complement.

Yes, I think that's a good approach Hendi I think that's a good approach.

That's how we look at it I mean, that's how we look at it.

Yes.

And then Don and Mike on gross margin as state above historical rates.

Our positive and negative <unk> debt other companies are talking non such as like higher raw material costs higher logistic costs and then on the on the positive side negotiation for higher price and it's from demand.

For electronic components.

Should we be thinking about gross margin in terms of dose on both I don't know, which slightly on both our applicable UK Kimball electronics case, and then which one may not be the case can you give some pumping on debt.

Well I mean, absolutely you said it well handy in terms of what what what those variables are that are inc. Any impact margin I do think we're in a period of time, where there is a recognition up and down the value chain that we have increased cost and those have to be dealt with.

I think sometimes in.

Sometimes there is a disconnect in the value chain and you might have those rising costs, but theres not a willingness to sit down and work on a commercial agreement that works for everyone.

And in the value chain I think right now we have this sort of synchrony synchronization, that's happening part of it due to <unk> debt in a pandemic part of it due to the global semiconductor a shortage, but there's at least an acknowledgment that there are these cost are real and they are increasing and they are likely not to decrease soon.

So were we.

We factor all of that into our operating margin target and because you also have the SG&A side of that.

Equation, if you will gross margin and SG&A and as our business grows we want to continue to look at operating leverage opportunities in our SG&A.

And so I would say that if we do come off or for 5% operating income target.

It could be both it could be gross margin and it could be more leverage on our SG&A.

But that's why we wanted to stay on the four 5% operating income target because.

We if we can consistently be around that number.

It will mean that we're getting the gross margin, we can and we're leveraging our SG&A like we should and yes more to come on that as we evaluate whether or not margin expansion is available to us.

After.

In the future quarters to come but but we have all of those kind of go into our blender of hitting on our four 5% operating income target.

Okay.

That's helpful.

And then Don can you give some color on industrial segment outside of semiconductor equipment, and then secondly, public safety revenue seem to indicate the ramp of new bonds bank any insight in those two.

Yes, so industrial.

First of all Hendi the biggest part of our industrial vertical business is climate control products.

And.

We have we have customers here in the U S and we have customers in Europe.

And so.

I would just want you to know first of all that's far bigger than for example, semi conductor semiconductor is more of a space, we're developing within ges less of a really large revenue source today and our industrial industrial vertical climate control would be the biggest.

And.

Coming behind it and what was gaining a lot of momentum before before the pandemic was smart metering.

Products, primarily in Europe that debt.

Really taken a hit due to the pandemic.

And once the pandemic subsides and other area, where we could we could hope that we would hope to see.

Growth.

Growth rates like they were back before the pandemic and so and climate control products right. Now are very strong we mentioned that here in the U S.

For the HVAC customers, we support.

Our back at it and business is very strong so that's a really positive sign for us.

We think that will likely continue in <unk>.

And yes, we're waiting to get another boost from from smart metering products, when we get back to where we were pre pandemic. There on the public safety side, we lost a legacy customer that we had for many years and we've been talking about losing.

Of that legacy customer and as the reason for the decline in public safety.

We never like to have that happen, but it happened and we managed to manage that to the exit.

Phase of that business and our funnel is now caught back up with new programs. Some really exciting programs as you know a public safety is not net.

On a big vertical for us, but we think it's very strategic and we have some some really strategic names in there that we support.

So it's nice to see that we finally have kind of gotten on the other side of losing that legacy business are winding that legacy business down and having our new business funnel fill it back in.

So Don how sustainable is the new funds in the public safety segment.

Well, we reported a nice number this quarter.

That's a good sign.

We're down to where we feel like we've got a solid base of business with a new funnel.

Typically hendi the challenge there the business opportunities in public safety or smaller.

And a little.

Little less consistent if you will.

When compared to our other verticals and theres more up and down undulations in that business in.

So I can't give you an answer really to your question on how sustainable it is.

But when we talk about an 8% organic growth goal, we expected in public safety just like we do on the other verticals and on a consolidated basis. So I would want you to know we're not happy if we're not at least at 8% organic growth on a consistent basis.

I see.

And then on this question for Mike from.

Mike can you give us some insight on the timing and then.

The amount of Capex for additional capacity in Thailand, and Mexico, I believe that you indicated above $8 million.

Production capacity in Thailand.

How much more you would need to complete that.

Well that that numbers, what we reported last time for facilities and I believe that might have included the first line going in.

It does not include working capital on other needs there.

Business ramps up we'll see a little bit of pick up there.

Timing wise that money for Thailand, as we started spending there.

Actually Q3.

Program in Q3, and so a large part of that will fall into Q4, and Q1, and we expect to take occupancy of that location I believe around December January of next year should be ready.

On the Mexico expansion, we just got debt approved this quarter.

We're sort of in the design phases, there on the building.

<unk> secured the land, we would expect to break ground there probably in late June early July and take about 12 months on the.

Number that Dan reported is really facilities and the initial infrastructure to get the building up and running.

We tend to add capital as we needed to support the revenue growth within the building so we'd be putting lines in kind of on a trigger basis as needed going forward.

Again, we would expect to take occupancy of that capacity.

Sometime next year from now probably around next June and July.

Uh huh.

We'd have some business, we think going into it immediately.

So hendi, maybe if I could build on Mike's comments, a little as well on in past calls we've talked about sort of a more normalized rate of capex would be something at or slightly above above depreciation, but when you look at bricks and mortar you just almost have to stack that right on top.

What would be on normal capex run rate net would be at or slightly above depreciation so.

As you look at your model and how you build your model.

I think you'd want to consider the fact that.

The $8 million number for Thailand, roughly in the $25 million to $30 million number for Mexico, they sort of sit on top of it.

Capex number that would be somewhere close to depreciation and a little above.

Does that makes sense.

Okay.

Correct, Lisa the Mexico.

Capex will be $25 million to $30 million, yes, it will be somewhere for the for the land and the building and the infrastructure for the building will be somewhere between 25 and $30 million.

Okay.

You spend debt hormone within a year.

It will take occupancy.

Laid out in installments as we break ground and move towards taken occupancy at the end, but yes, we think Mexico, we'd be taken occupancy somewhere around a year from now so yes that that most of that capital would be deployed.

In FY 'twenty two.

Okay.

And then last question for me.

You indicated debt capacity at Mexico is running at full capacity can you give insight into other manufacturing location, which will not be on at full capacity.

Two for capacity.

Thailand, We did that's why we released the expansion there.

As I mentioned earlier Hendi I think as we look at the preferences of our customers new business pipelines and <unk>.

Projected or forecasted.

Needs.

Yes, I would say, China, and Poland, or maybe we could say Europe.

But Poland.

It would be areas that we're keeping a close eye on because they are running at high utilization rates today.

I see how about Romania.

Romania is ramping up to also.

Also running at a high utilization rate. So that's one of the things we want to study it's unlikely we would expand them. Both at the same time, both be in Poland, and Romania, We would look at our again, our customer preferences, where they are expecting us to add capacity in Europe and then we would we would decide we believe.

That's a little further out handy, it's not next year. It's further out for their out then Thailand, and Mexico, but we can see where those operations are running from a utilization standpoint, and we can see it coming let's say on a three year horizon for sure.

Possible IC, possibly.

Thank you Don Thank you Mike all the cash.

The remainder of the year.

Thank you Andy.

Your next question comes from John Day share of Pinnacle go ahead, Mr. Fischer.

Ask your question good morning, everyone and thanks for taking my call.

Most of my questions have been answered, but I just wanted to circle back to.

The capital spending for both Mexico, and Thailand can.

Can you give us your ballpark estimate of what Capex is going to be for both for year end June 'twenty, one and next year June 'twenty, two that would be very helpful.

21 might be tougher than 'twenty too John just because you know depending on how some of that spending falls between now and the end of the fiscal year and the start of fiscal year 'twenty two.

But if you look at our depreciation and as I said, we would expect kind of a normal operating condition that we would we would run at depreciation or slightly above when we're growing life for growing so let's take that number at between 30% and $35 million today depreciation.

And then you add on top of that the Thailand, and Mexico expansions.

You are probably getting close to twice depreciation.

For fiscal year 'twenty, two are pretty close to it and again it depends how much falls into Q4, 'twenty, one and then how much sort of slipped over to FY 'twenty two but that is how we want you to think about it at least assets.

Accurate as I can get it to you at this at this stage so just thinking through those numbers you're thinking.

On a 60 to 70 million in FY 'twenty two.

<unk> Yep Yep Yep ballpark.

Okay and 'twenty one.

We haven't seen the Q, yet so I guess, we don't know what the year to date can.

Can you tell us on with year to date Capex is for fiscal 'twenty one.

While we were running around eight per quarter up until now I think we could see a bigger Q4 at the thing I would want it. So once you once you get a chance to look at the number it is probably somewhere around 22 to 24 in that range.

But depending on how much debt capital as I mentioned.

That could slip from Q4 into Q1 of next year actually lands in Q4.

That's a number we're looking at but it's likely going to be the highest capex quarter of the year Q4 that is likely to be the highest capex quarter.

The fiscal year, Okay, alright, good and how are you anticipating financing, Thailand and Mexico.

From available liquidity.

Okay.

Alright cash flow that's good.

And you mentioned your phone in your customers' request.

I was just curious.

The pipeline for the customers who are.

Pushing you to expand Mexico, what verticals does that.

Fall into for those new customers who are.

Moving the expansion for forward, that's really interesting good question.

Have some large programs already awarded in automotive industrial and medical we have others that we're working on to get awarded.

All three of those verticals will be well represented in the expansion.

Represented equally do you think are skewed one towards the other that's a really good question.

All are competing for capital they all added to hit our targets for return on invested capital.

Looking at how it looks right now it could be a third a third a third.

Uh huh.

Okay.

Good thanks for that color I appreciate it.

Thank you. Thank you.

If you would like to ask a question.

Please press star one.

And your next question is from Jason Crawshaw with Polaris Capital Management. Please go ahead, Mr Cross shop.

Yes, hi, good morning.

A quick questions.

I guess in the case that you get a decommit from a supplier.

Are there sort of penalties.

That you'd have to pay to the customer for the Decommit I E that you can't fulfill the order or is that just sort of normal course of business that is the reality of the current state of the situations I guess, that's the first question.

Well it ends up being in the conversation Jason Thats for sure, but I think when it's this widespread what we experience it's almost like a force majeure kind of operating condition and the value changes realizes that we're all going to have to get through this together and we can't just be firing lawsuits at each other.

So I would say it ends up in the conversation.

It ends up in and some other frustrating comments, but I think in general we stick together and get through it as a value chain.

Got it Okay. That's fine and then I guess just in terms on second question. I mean, if you think about kind of the shortage in semi and auto is.

Is it across the I guess the entire.

Chips.

Chipset are sort of product line are there certain parts that are substantially exacerbated on there are some parts of why you're still going to get a fair amount of chips in autumn.

Yes, it's more like across everything in.

In terms of all component types.

And.

If you ran down the list of the big seven semiconductor suppliers in the world.

All have their challenges I wouldn't necessarily hold one of them out as being better or worse than the other so.

I would say this though Jason some of those component categories.

We will recover faster because the capacity increment and the lead time to actually make the part is different so they won't all get well at the same time they didn't all get bad at the same time you had short at the same time, but.

The recovery will be different by component category.

Got it great and then I guess just the last question sort of when you do your forecasting right.

Let's say you've got commitments from suppliers that for 100 right.

But you kind of look around and see what the economic reality is if they're telling you 100 do you kind of handicap lets say you know what we're only going to bake in 90 or Youre forecasted forecasting based on exactly what your suppliers are telling you.

Both.

If there's a track record of performance will build on our production schedule around that commitment from that supplier.

If theres not a track record of performance, maybe if there's a track record of D. Commence Yes, then, we'll we'll hedge and what we put in our guidance.

Okay. Thanks, guys appreciate it thank you.

I'm showing no further questions at this time I would like to turn the conference back to Mr. Don Charron.

Thank you Cindy.

Thank you everyone that brings us to the end of today's call. We appreciate your interest.

And look forward to speaking with you on our next call. Thank you and have a great day.

At this time listeners may simply hang up to disconnect from the call. Thank you and have a nice day.

For those.

[music].

Yes.

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Okay.

Yes.

[music].

Yes.

[music].

Thank you Sandy and good morning, everyone. My name is Andy <unk> and I recently joined Kimball electronics as the head of Investor Relations.

I'd like to welcome you to our third quarter Conference call with me here today is Don Charron, Chairman and CEO, Mike Circus, scatter, Vice President and Chief Financial Officer, and Janet Croom, Vice President Finance.

We issued a press release yesterday afternoon with the results of our third quarter ended March 31 2021 to.

To accompany todays call a presentation summarizing the financial results has been posted to the Investor Relations page on our company website within the events and presentations tab.

Or if you are listening via the webcast you can follow along by advancing the slides or download them from the downloads tab on the webcast portal.

Before we get started I'd like to remind you that on today's call. We will be making forward looking statements that involve risks and uncertainty and are subject to our safe Harbor provision just stated in our press release, and our SEC filings and that actual results can differ materially from forward looking statements. All commentary today is focused on non-GAAP results for the third quarter of fiscal 2000.

Thanks, Andy and good morning, everyone.

I'm very pleased with our results for the third quarter.

Our team remains resilient in the face of many ongoing challenges around the world, including the COVID-19, pandemic and the global shortage of semiconductors.

Despite these headwinds we delivered solid top line growth with very good results across multiple end market verticals and our adjusted EPS in the quarter was up 56% compared to Q3 last year.

In addition, the operating margin rate once again exceeded our goal of four 5% and we generated strong cash flow from operations for the fourth consecutive quarter on.

On a year to date basis, our cash flow from operations has more than doubled from the prior year.

Due to the global shortage of semiconductor is a significant amount of our shippable backlog shifted out of Q3, and Q4 of fiscal year 2021 and into the first half of fiscal year 2022.

Many industry experts are forecasting at this semiconductor shortage will remain with us for most of this calendar year.

Our materials teams around the world have been working day and night to find solutions to overcome this shortage.

Yeah.

Net sales increased 6% compared to the same period last year and while foreign currency did have a favorable favorable impact the growth was solid even after adjusting for FX.

Strong sales increases were posted in our automotive industrial and public safety vertical.

Verticals.

Automotive sales were up 12% in Q3 from a year ago with the strength, resulting from ramp up of certain programs, including fully electric vehicles.

Lower volumes in the third quarter last year, which began to see the impact of COVID-19, and favorable foreign exchange rates.

This is an area, where we continue to invest to keep pace with expected future growth as the popularity of electric vehicles rises.

There are other applications that are similar in terms of approach and focus and we have been successful in winning additional programs.

We have strong relationships with several customers that support many of the most popular brands in the world and we expect these relationships to fuel growth in this for.

In this vertical market in the years to come.

On a sequential basis sales in automotive were down 8% from last quarter, an outcome from the global semiconductor shortage.

While dependent on our ability to overcome the component shortages, we expect sales to continue to be strong into fiscal year 2022.

We expect this decline to be short lived as more of the population is vaccinated and physicians offices and hospitals resume elective procedures and activities.

And favorable FX.

We offset by decreased demand for smart metering products.

We expect a strong fourth quarter in the industrial vertical driven by orders for machines scheduled to be shipped by Ges.

And finally sales in public safety, we're $13 5 million, an increase of 9% driven by the ramp up of new programs.

We expect to break ground over the summer with completion within approximately 12 months.

This combined with our Thailand expansion as a continued demonstration of our strong market positioning and growth opportunity for the future.

And finally I am so proud of our team on the effort to deal with the challenges caused by the pandemic and the global semiconductor shortage.

In April we were honored by achieving the highest overall customer rating.

In circuit Assemblies, 2021 service Excellence Awards.

Consistency in anonymous surveys such as this speaks volumes about our customer service culture. So I'd like to point out that this is the third time and for years that.

Debt, we have been recognized for this award.

Companies with annual sales over $500 million.

This is a great example of how our strong company culture and core values are helping us get through this together.

Now I'll turn it over to Mike to discuss our third quarter results in more detail.

Mike Thanks, Don and good morning, everyone. During my comments I will be referring to the slide deck Andy mentioned during his opening comments.

As Don mentioned and depicted on slide three third quarter net sales were $310 3 million, a 6% increase compared to net sales of $293 $9 million in Q3 last year.

Foreign exchange rates favorably impacted sales by 3% in the third quarter.

A breakdown of sales by vertical market as described by Dan as summarized on slide four.

Our gross margin rate in the third quarter reflected on slide five was eight 4% a 150 basis point increase from the third quarter of last year.

The gross margin improvement was driven by improved operating execution favorable product mix within our automotive vertical market. A result of the shift to more mature on larger programs and favorable foreign currency rates, partially offset by higher profit sharing bonus expense.

Adjusted selling and administrative expenses were $11 $6 million in the third quarter up $1 million or 10 basis points when measured as a percentage of sales compared to the third quarter last year.

This increase was primarily driven by higher profit sharing bonuses higher salary and payroll related costs.

Adjusted operating income for the third quarter was $14 $4 million or for 6% of net sales.

As shown on slide seven in the deck.

This represents an improvement from $9 7 million or three 3% of net sales in the same period, a year ago, primarily driven by the increase in gross profit that I just mentioned.

Other income and expense was an expense of $600000 in the third quarter, which compares to expense of $1 $9 million in the third quarter of fiscal year 2020.

The expense in Q3 of this year includes $600000 in net foreign currency losses, and $300000 of net interest expense, partially offset by $200000 in gains on the surf investments.

The expansion in the third quarter last year includes $1 1 million of net interest expense $900000 in losses on the surf investments and $200000 in net foreign currency gains.

The effective tax rate for the current year third quarter was approximately 25% in the prior year third quarter. The effective tax rate was approximately 28%.

Adjusted diluted earnings per share were <unk> 39 in the third quarter. This compares to diluted earnings per share of <unk> 25 reported for the same quarter last year.

Now turning to the balance sheet cash and cash equivalents at March 31, 2021 were $89 7 million.

Operating cash flow trends are shown on slide 11.

Our cash flow provided by operating activities during the fiscal third quarter was $31 $5 million draw.

Driven by net income plus noncash depreciation and amortization and changes in working capital.

In the prior year third quarter operating activities provided $12 million of cash.

Our cash conversion days for the quarter ended March 31, 2021 were 66 days down from 81 days in the quarter ended March 31, 2020, and down from 75 days in the second quarter of fiscal year 2021.

Compared to the second quarter of fiscal year 2021, we saw improvement in each of our day sales outstanding contract asset days production day supply on hand, and accounts payable days.

Slide 12 reflects our capital and depreciation trend for capital investments in the third quarter of $8 $7 million were largely to support launch and ramp up of new programs and to replace older machinery and equipment.

We continue to study our capacity needs to support growth plans.

The board approved plan to expand our Thailand operations was officially kicked off last quarter and to plan to expand our Mexico operation was approved this quarter.

Both expansions add much needed capacity to support the forecasted growth from both existing and future customers and demonstrate our strong organic growth opportunities.

Borrowings on our credit facilities at March 31, 2021 for $65 million.

Which is down $25 6 million from December 31, 2020, and $57 6 million from June 32020.

Our short term liquidity available represented as cash and cash equivalents plus the unused amount of our credit facilities totaled $226 million at March 31 2021.

In conclusion, our financial condition continues to be strong and we're in excellent position to take advantage of growth opportunities and improve operating margins and return on invested capital.

Being able to confront that continued uncertainties caused by the COVID-19 pandemic and the global semiconductor shortage.

I'll now turn the call back over to non.

Thanks, Mike.

Before we open the lines for questions I'd like to make a few closing comments.

First I need to reiterate how proud I am of our people around the world we.

We have made the health and safety of our employees our number one priority all while continuing to deliver on our promises to our customers.

The company is in a solid position and we are committed to build success in the future.

On behalf of our board of directors and the entire company I want to extend our sincere gratitude and appreciation to Mike for his dedication and service.

Mike We wish you the very best you will always be a valued member of the Kimball electronics family.

I also want to congratulate Jana on her new role as CFO.

We are fortunate to have a leader of Janus caliber ready to assume the range for this key position.

Her experience in financial management strategy and operations.

Her an ideal fit to move our organized organization forward.

Jan would you like to say a few words.

Thanks, Don and very excited about the opportunity to take over from Mike.

Electronics has a distinguished history, a talented team and a promising future with a strong company culture, and our purpose of creating quality for line.

I look forward to working alongside you and the other members of the leadership team to drive growth and enhance shareholder value.

Thanks, Jan on looking forward to it too.

With that I would like to open the lines for questions.

Cindy do we have any analysts with questions in the queue.

Ladies and gentlemen analysts may ask a question at this time by simply pressing star one on your dial pad you may remove yourself from the queue by pressing star too on your dial pad.

Asked.

Debt. If you are using a speakerphone you pick up your handset before asking your question and one moment. Please for the first question.

Your first question comes from Anja Soderstrom with Sidoti.

Hi, everyone and congratulations on a good quarter amidst the challenging backdrop and my first question will be on the index for the segment ended GFS business day can you just elaborate a little bit on how that's been trending.

And also maybe talk a little about the about the competitive landscape for Ges.

Sure on yet.

First of all I want to just remind you that we do have a degree of seasonality in our Ges business.

And so.

Overall.

Also if you look at what.

What customers we serve.

With Ges is services.

They are primarily in the manufacturing of smart mobile devices.

And semiconductor industry. So those are the types of industries that are machines that we develop design and manufacturer. They serve those needs. If you will in the market.

And when you look at the spending the capital spending.

Trending in those areas.

It's quite strong now.

And market.

The semiconductor industry as you know is adding capacity at a pretty rapid pace right now given the shortages in and just the fact that demand has far outpaced supply here.

We are we are actively pursuing a diversification strategy because the technology that we have in one there at ges.

Especially in areas like optical inspection of really critical dimensions.

That technology is used in many different manufacturing environments supporting many different end market vertical so.

We have a diversification strategy is active there and we hope to debt to continue to grow that business, but right now it's strong and it's trending upward in those two areas I mentioned smart mobile device manufacturers and semiconductor.

Okay. Thank you and Dan.

Auto assets segment.

It seems like you said the backlog is going to spill into the fiscal 2020, but you still have them.

Visibility for the fourth quarter and say you have supply to support the assets that can just talk about the dynamics day and.

What we wanted to have a strong first quarter. It looked like Dara and you have a pretty easy compare year over year, but a little bit tougher sequentially.

Yes.

Preface, what I'll say there on you and the fact that we have commitments from suppliers for deliveries in <unk>.

We're factoring that into our production plans every day as we speak.

The biggest risk we face is if a supplier decommit, meaning that they gave us the delivery schedule.

And they couldnt immediate themselves for their own reasons and so that's the biggest risk we face but that being said when you look at the commitments we have.

Commitments would support a strong fourth quarter for us.

And plus as we mentioned in the script today GE, the Ges machines and the order for machines from Ges will also be strong.

<unk> contributor to the quarter, but becoming specific specifically back to automotive yes. We are looking at the commitments, we have from suppliers and we're factoring those into.

What we think our production and sales will be in the quarter and that's why we believe we're going to have a strong fourth quarter.

Also would just say that demand that demand that it shifted out it did not cancel I just want to emphasize that it shifted out and so we.

We can see.

Loans and demand being quite high buyers in the market. So.

That should prove to be very favorable for our automotive end market vertical and especially as this component shortage starts to subside I am confident in our ability to execute on the manufacturing side once once the semiconductor short each subsides.

Yes.

Okay.

Good color, then and what are you seeing their income.

It is returning.

Yes, still still a flow pace on that as you know we had the favorable impact of building that COVID-19 year. When the demand was there for COVID-19 patient care.

<unk> built out its run its course.

But we still see areas of our medical end market vertical that are not yet back at pre COVID-19 run rates.

Rates that we're seeing across the U S.

Obviously, you have the rest of the world, we'd like to see keep pace as well.

That should help that should help.

And that'll be a nice increase of opportunity to increase our sales are in our medical vertical win when that does happen.

Okay. Thank you and in Tulsa.

Utilization and capacity expansion.

Yeah.

Hi.

Talking about Mexico, extending cycle now at why Mexico on and what are you primarily.

Producing in Mexico.

Yes on Mexico as a large facility for us today that one of the largest facilities. We operate in we've been there for decades, and it's a very popular preference of our customers. So.

And I guess to answer your question what do we make there we support all four verticals there in Mexico.

Very complex large scale manufacturing facility.

And again supports all four of our end market verticals and we're at capacity we're at capacity.

That's how close I wanted you to know how close we take it before we make a decision to expand.

And it's in the expansion decision is based on the popularity of that footprint to our customers in other words, that's their preference.

For various reasons.

That's their preference and thats, where they'd like to see their product manufactured so we've following really following our customers with these expansions if you will.

Okay. Thank you and lastly.

But your cash.

Cash cycle days improvement that you're talking about every day.

It seems like a fair and sustainable.

And what's the put and takes there and then I.

I guess, that's a little support from <unk>.

Improved cash flow if you can keep it at that level.

Yes, structurally when we do our analysis structurally we believe 65 days is where we should be operating on a on a pretty consistent basis.

In this environment with component shortages at anytime you hear us say shippable backlog is pushing out because of a shortage issue as we talked about today.

That usually means some inventories coming in but the one part you need to build a unit is not and so.

We would expect to see.

Our <unk>, which is our inventory metric grow in this period.

It would be short term and we work it back down.

But we do think it's sustainable and I wanted to explain the global semiconductor shortage. So that you would understand that.

With with this type of a shortage situation where customers want the product, it's shippable backlog, but its moving out because of the shortage.

Some of that inventory is going to come in and we will see a swelling a temporary swelling, but we are as a management team working hard to keep keep our cash conversion cycle was 65 days and we haven't been there and for various different reasons reasons. We've we've kind of had to battle to get there over the last few quarters.

We actually had excess inventory for example that we've been working down during this period in other areas of our business. So I would I would want us to think about 65 days as a normal landing.

Pattern for us on the whole cash conversion cycle.

And what's your ability to that to take deposits for inventory that you need to hold.

That's not as prevalent in our customer relationships and commercial agreements.

But we have.

And we will.

<unk> in the future.

Okay.

I'll hand, it over I just want to wish.

We wish Mike dwell on his new chapter and congrats.

Congrats on the net gain on hernia acquisition on the can probably be working with you.

Thank you very much on him. Thank you.

Thank you on yet.

Your next question comes from Mike morality of Wall Chasm and company Mr. Morale. Let's go ahead with your question.

Thank you operator, and good morning, Don Mike.

Good to talk.

So let me get the important things out of the way first I'll Echo congratulations on your retirement, Mike It's been a real pleasure working with you over the years and best of luck on your future endeavors wherever that may take you on that.

Likewise, congratulations Jan on the.

New role really excited to see what you can bring to the company.

Alright, let's get down to brass tacks now lots of good color and the answers there.

As I think about the commentary on the fourth quarter and the raw material shortages that everybody seems to be facing right now.

I think back to when we saw some production disruptions in the auto OEM space.

Last year and kind of the headwinds that caused certainly on the news, we're seeing a lot more of that.

Across Oems is pretty much globally.

Is that kind of baked into your expectation for the fourth quarter based on where you're sitting today or not.

On that qualitative commentary.

Those production or disruptions even with.

How severe they may be theres still a pathway to sequential growth.

We think so again, Mike I would just preface that with.

We're in this shortage, we've got commitments, we baked that into the Q4 outlook.

Commentary and.

So the risk we face that we have to manage as decommitments and and we're doing that as I mentioned on our teams around the world are working this thing day and night, but we're not in total charge of that.

As you can imagine with our supply base of the big names that I know you are familiar with and the fact that we're in there competing for those parts in many cases with a lot of different.

Say buyers that need that material, but in terms of the demand is very strong.

In terms of customers, taking everything we can build for example, very strong.

So if there is an opportunity to improve a shortage for example, and instead of the Decommit risk I gave you actually a supplier did better than they committed and delivered us more on material that certainly could just as easily deliver upside more upside for us because the demand is.

Very strong.

For Us I think the big the big the Big Challenge is really.

To make sure that we don't get more day commence.

We have we have we have strong demand with existing.

Customers on existing programs, we've got new programs that are still ramping up.

And we've got all three of our geographies really pushing hard and I would say all three China and North America and Europe.

And so yes, it's the demand is there we got to manage the Decommit and.

It should it should result in a very strong fourth quarter for us.

Understood.

And I think the auto industry has kind of found itself on the unique position right now of.

Having stepped out of line as it relates to picking up these semiconductor components and now they are at the back of the line on they can't come to the front and get what they need.

And as I think historically, that's a very new thing for the auto industry for the question is.

Discussions with any of your major customers, whether existing or perspective.

Aged or evolved as they think about consistency of supply.

You had mentioned about the customer deposits on a huge part of the relationship now.

But do you see anything changing or are there ways that.

This shortage impact the way that you guys do business from a.

Customer relationship standpoint, as it relates to supply.

Well first of all Mike you said that very well in terms of let's say automotive getting out of line and go into the back of the line and realizing they can't fight there were weighted to the front of the line they're learning a lesson.

We have the opportunity to talk to our customers, which again are some of the largest tier one.

Companies.

In the world and so they deal with all these vehicle Oems.

There is a lesson being learned here by all debt.

Should not have got out of line in the first place you would've had a more.

Comprehensive.

Supply chain strategy to get through the pandemic and.

Yes, I think the lessons being learned and I do think we will see changes in how.

Laws of physics start to come into play in terms of how fast you can turn back on the supply, especially in the area of semiconductors. So there's lessons being learned I do think what we will see and what we've already required from our customers proactively and this goes back several months ago, Mike we were already asking our customers to place firm.

Orders on on.

On us or or forecast that were very firm out for a full year.

So that as we got back in line for.

This component supply we stayed in line we stayed in line with the right kind of forecast going out far enough and so it's going to take a little while to get through this but I definitely believe.

There is less there is a lesson being learned here.

Right right.

That's helpful.

Maybe switching to the Ges business and the positive commentary there.

We can't talk about the shortages and the challenges without talking about maybe the benefit that that could bring for the <unk> business.

Can you help me understand what the sales cycle looks like for that business and is there some metric that you guys use to gauge the.

The health of the sales funnel there, whether it's like evaluation tool from the field or some other metric that you'd be willing to share and just Uh huh.

Help me understand how prospective new business there.

<unk>.

Yes, we're learning.

There's things we want to do in that business, it's exciting there.

The revenue is capital equipment, you would think that that the orders for that capital equipment will be placed far in advance just given the nature of it but it really is not that way at least our experience. So far it's not that way. These are.

Are.

These are machines that are worth.

Hundreds of thousands of dollars, but the.

In terms of the technology and the problem that technologies aimed to solve aimed at to solve and so so we are we are working on trying to develop.

Some better funnel metrics to communicate to more effectively communicate around this business as I said, it's a technology driven company.

And as technology, we in many cases one.

In terms of intellectual property.

So we're excited about the opportunities.

And the growth in the applications, but we're still learning and I hope I hope soon we will be able to talk more about the funnel metrics.

So that you can get an idea of what the outlook looks like and of course, our diversification strategy, we're hoping will help.

Really kind of soften that degree of seasonality that.

I spoke about because we have.

Very strong Q4s that we can report we have reported and of course, we've got a backlog number we're looking at for Q4. This year that is very strong, but we also have quarters that are pretty light and so we're working on that as well.

Got it got it that's really helpful color.

It's good to see the consistency on the financial results too as it relates to the margin targets that you guys have laid out, especially in a challenging environment. So good works folks.

As far as.

For those targets that you've put out there.

As management has been working on that for a long time to put some more consistency around that operating income margin target.

And we have now hit it or exceeded it three quarters in a row and we're happy about that but we're not we're not satisfied.

We want to perform more consistent we wanted to get a few more quarters under our belt in terms of consistency.

First step for this part of our journey is to put some consistency foot per.

More than three quarters together hitting our target.

But I would want you to know that we as a management team believes there's margin expansion opportunities.

Fantastic Lastly from me I'll ask the question. This way as you look at your facility.

Facility portfolio right now are there any other popular facilities with your customers that are near or at capacity.

Yes.

[laughter] I don't know if you want more color.

On the top.

Sure.

I would just I would want you to think about it this way we have.

Our new business opportunity pipeline is very healthy.

And so our challenge is to look at our footprint and see where customers are wanting us to be.

And as we approach floor space capacity in these operations.

Make good smart capital deployment decisions around expansion.

The other thing I would want you to know as we in this period, let's say over the next three years.

Our primary focus is going to be on expanding where we are so on in addition to where customers want us to be expanding where we are and why is that message important if you think back for the Romania Greenfield.

Those expenses are hitting your way beyond revenue and you're building a new team Youre getting certified Youre getting qualified and you.

You probably can remember all of the quarters, we talked about how much of a drag Romania was on our results.

Because it is a greenfield and now it's up and running unprofitable et cetera. So.

When we book it.

As dilutive as long as say the Romania Greenfield was there's certainly it can't be perfect Youre always going to have some expenses that just ahead of revenue, but it's minimized and on in a model, where we're expanding where we are and so when I when I look at our footprint with Thailand and Mexico.

With those expansions were set for for several years.

I look at our growth in China, and I look at our growth in Europe, I know, we just did Romania, but our growth in Europe, and we look out into the future.

Those are some expansions that we could be talking about.

And it would be fair to assume that all of these discussions would be done on a similar way to the way that youre approaching the Mexico expansion as it relates to prospective new business being on the cost to fill.

That expansion right. That's right. That's right. Yes. It is a kind of a field of dreams sort of analysis I don't know if you ever saw that movie but.

If you build it they will come in but we try to say what we'd like you to sign a little bit of a commitment to us before we build it before we split this baseball field in our current cornfield in Io of it. It is a bit of that is a challenge for us is to try to to line that up the best we can but you know for customers really to commit business.

For a site that's full if you put yourself in their shoes, that's pretty tough, especially on larger program. So we've got to find the right balance in there.

We did that in both the Thailand, and Mexico business cases.

And so now we're racing to get occupancy of those expansions and.

And and get awarded those those programs from customers that basically pushed us to do it.

Great I appreciate all the color for folks, it's great to touch basically well.

Hey, Mike Thank you take care.

Your next question comes from Hindi.

Susana <unk> with <unk>.

Gabelli funds. Please go ahead Mr <unk>.

And then first of all thank you Mike for all our interaction and you will be missed all the best for your retirement.

Thank you.

Oh.

You share that you're expecting.

Strength in Q4 sequentially and year over year, you said like very strong.

Is it reasonable to expect double digit on both can you quantify that.

First of all Hello, Hendi. Thank you for your question.

I can't quantify it with that type of precision handy, but for.

First of all the we know that.

The year over year comparison is somewhat of a soft comparison given given the Q4 number we had last year and so you know.

I think maybe.

Maybe that we set that one aside and just kind of look at the quarter. We finished just now at $310 million and say how much was that impacted by these material shortages.

How much material commitment do you have.

Yes, when we look at the quarter. We just finished in commenting that you know a significant amount of shippable backlog moved out ahead of us some of that is going to get recovered in Q4 as I mentioned there is a pretty good chunk of it that moved out in the first half of fiscal year 'twenty two but.

If I look at that $310 million, a quarter and said very strong yeah, you're you're.

It's a stronger growth rate than what we had in Q3 that we think will be able to achieve in.

As far as I can go with that handy and again I'd just reiterate the big risk we've got to manage their as Decommitments.

So.

We could walk out of this call today and go to a meeting and find out.

One of our major semiconductor suppliers.

Couldnt deliver what they committed to deliver for some for some reason so I would caution you with that but in terms of the demand on the material commitments, we have right now a strong quarter.

And focused I would I would ask you to focus on the sequential part of that more than the year over year comparison.

Yes.

And then if we focus on a sequential.

Hi.

I think overall, we are seeing a strong demand in automotive and then people are expecting strong demand and supply short dates for the next several quarters.

And then and then if you look at your automotive sales in the last quarter like 140 million can we think debt.

Debt can be a base line, while you're still dealing with strong demand in automotive and in short dates in components.

Yes, I think that's a good approach Hendi I think that's a good approach.

That's how we look at it I mean, that's how we look at it.

Yes.

And then Don and Mike on gross margin has stayed above historical rates.

They are positive and negative variable debt other companies are talking now such as like Hyatt on material costs.

Logistic costs and then on debt on the positive side negotiation for higher price and then strong demand for.

For electronic components on how should we be thinking about gross margin in terms of those funny on both I don't know, which one you are both are applicable UK Kimball electronics case, and then which ones may not be the case can you give some color on that.

Well I mean, absolutely you said it well handy in terms of what what what those variables are that are going to impact margin I do think we're you know we're in a period of time, where it's there is a recognition up and down the value chain.

We have increased cost and those have to be dealt with.

Think some times in.

Sometimes there is a disconnect in the value chain and you might have those rising costs, but theres not a willingness to sit down and work on a commercial agreement that works for everyone.

And in the value chain I think right now we have this sort of synchrony synchronization, that's happening part of it do depend on the pandemic part of it due to the global semiconductor a shortage, but there's at least an acknowledgment that there's these costs are real and they are increasing and they are likely not to decrease soon and so we're.

We factor all that into our operating margin target and because you also have the SG&A side of that.

Equation, if you will gross margin and SG&A and as our business grows we want to continue to look at operating leverage opportunities in our SG&A.

And so.

I would say that if we do come off or for 5% operating income target.

It could be both it could be gross margin and it could be more leverage in our SG&A.

But that's why we wanted to stay on for 5% operating income target because you.

We if we can consistently be around that number.

It will mean that we're getting the gross margin, we can and we're leveraging our SG&A like we should.

Yes, more to come on that as we evaluate whether or not margin expansion is available to us.

After.

In the future quarters to come but but all of those kind of go into our blender of hitting on our four 5% operating income target.

Okay.

That's helpful.

And then Don can you give some color on the industrial segment outside of semiconductor equipment, and then secondly, public safety revenue seems to indicate a ramp of new bonds bank any insight in those two.

Yes, so industrial.

First of all Hendi the biggest part of our industrial vertical business is climate control products.

And.

We have we have customers here in the U S and we have customers in Europe.

So.

And.

Coming behind it was gaining a lot of momentum before before the pandemic was smart metering.

Products, primarily in Europe that has really taken a hit due to the pandemic.

And you know once the pandemic subsides and other area, where we could we could hope that we would hope to see.

Growth.

Growth rates like they were back before the pandemic and so and you know on climate control products right. Now are very strong we mentioned that here in the U S.

For the HVAC customers, we support.

Our back at it and business is very strong so that's a really positive sign for us.

We think that will likely continue in and we're waiting to get another boost from from smart metering products. When we get back to where we were pre pandemic. There on the public safety side, we lost a legacy customer that we had for many years and we've been talking about losing.

That legacy customer and as the reason for the decline in public safety.

We never like to have that happen, but it happened and we managed it.

Manage that to the exit.

Phase of that business and our funnel is now caught back up with new programs. Some really exciting programs. As you know public safety is not not a big vertical for us, but we think it's very strategic and we have some some really strategic names in there that we support.

So it's nice to see that we finally have kind of gotten on the other side of losing that legacy business are winding that legacy business down and having our new business funnel fill it back in.

So Don how sustainable is the new final rule in the public safety segment.

Well you know we reported a nice number this quarter.

That's a good sign and we're down to where we feel like we've got a solid base of business with a new funnel typically hendi. The challenge there the business opportunities in public safety or smaller.

And a little.

Little less consistent if you will.

When compared to our other verticals and theres more up and down undulations in that business.

So I can't give you an answer really to your question on how sustainable it is.

I see.

And then on let me ask this question for Mike from.

Mike can you give us some insight on the timing and then.

The amount of Capex for additional capacity in Thailand and Mexico.

Believe that you indicated above $8 million to expand production capacity in Thailand.

I don't know how much more you would.

Need to complete that.

Well debt.

That numbers, what we reported last time for facilities and I believe that might've been included into first line going in.

It does not include working capital on other needs there.

Business ramps up we'll share a little bit of pick up there.

Timing wise.

Money for Thailand, as we started spending there and.

Actually Q3.

Broke ground in Q3, and so a large part of that will fall into Q4, and Q1, and we expect to take occupancy of that location I believe around December or January of next year it should be ready.

On the Mexico expansion, we just got that approved this quarter.

We're sort of in the design phases, there on the building.

Secured the land, we would expect to break ground there probably in late June early July to take about 12 months on.

The number that Dan reported is really facilities in the initial infrastructure to get the building up and running and we tend to add capital as we needed to support the revenue growth within the building so we'd be putting lines and kind of on a trigger basis as needed going forward, but we were again we were.

Would expect to take occupancy of that capacity.

Sometime next year from now probably around next June and July.

We'd have some business, we think going into it immediately.

What would be on normal capex run rate that would be at or slightly above depreciation so.

As you look at your model and how you build your model.

You'd want to consider the fact that the the 8 million number for Thailand, roughly in the $25 million to $30 million number for Mexico, they sort of sit on top of our cash.

Capex number that would be somewhere close to depreciation and a little above that.

That makes sense.

If I heard you correctly for the Mexico.

Capex will be $25 million to $30 million, yes, it'll be somewhere for the for the land and the building and the infrastructure for the building will be somewhere between 25 and $30 million.

Okay.

And then really the spend that's all loans within a year.

It will take occupancy.

As laid out in installments as we break ground and move towards taken occupancy at the end, but yes, we think Mexico, we'd be taken occupancy somewhere around a year from now so that.

Debt most of that capital would be deployed.

In FY 'twenty two.

And then last question for me.

Tom you indicated debt capacity at Mexico is running at full capacity can you give insight into other manufacturing location, which will not be on at full capacity.

To full capacity.

Thailand, We did that's why we released the expansion there.

As I mentioned earlier Hendi I think as we look at the preferences of our customers new business pipelines and <unk>.

Projected or forecasted.

Needs.

Yes, I would say, China, and Poland, or maybe we could say Europe.

But Poland.

It would be areas that we're keeping a close eye on because they are running at high utilization rates today.

I see how about Romania.

Romania is ramping up to also.

Thats a little further out Hendi, it's not next year. It's further out for their out then Thailand, and Mexico, but we can see where those operations are running from a utilization standpoint, and we can see it coming.

Say on a three year horizon for sure.

I see possibly.

Thank you Don Thank you Mike all the best.

The remainder of the year.

Thank you Hendi.

Your next question comes from John does share of Pinnacle go ahead, Mr. Fischer.

And ask your question good morning, everyone and thanks for taking my call. Most of my questions have been answered, but I just wanted to circle back to.

The capital spending for both Mexico and Thailand.

You've given us your ballpark estimate of what Capex is going to be for both for year end June 'twenty. One next year June 'twenty, two that would be very helpful.

21 might be tougher than 'twenty too John just because depending on how some of that spending falls between now and the end of the fiscal year and the start of fiscal year 'twenty two.

But if you look at our depreciation.

As I said, we would expect kind of on normal operating condition that we would we would run at depreciation or slightly above when we're growing life for growing so let's take that number at between 30 and $35 million today depreciation and then you add on top of that the Thailand, and Mexico expansions Youre.

Probably getting close to twice depreciation.

For fiscal year 'twenty, two are pretty close to it and again it depends how much falls into Q4, 'twenty, one and then how much sort of slips over to FY 'twenty two but that's how we want you to think about it at least assets.

As accurate as I can get it to you at this at this stage.

So just thinking through those numbers you're thinking.

$60 million to $70 million in FY 'twenty to ballpark Yep Yep Yep ballpark, okay in 'twenty one.

We haven't seen the Q, yet so I guess, we don't know what the.

Year to date.

Can you tell us what the year to day Capex for fiscal 'twenty one.

While we were running around eight per quarter up until now I think we could see a bigger Q4 at the thing I would want it. So once you once you get a chance to look at the number it it's probably somewhere around 22 to 24 in that range.

But depending on how much of that capital as I mentioned.

That could slip from Q4 into Q1 on next year actually lands in Q4 that's.

That's a number we're looking at but it's likely going to be the highest capex quarter of the year Q4 that is likely to be the highest capex quarter.

The fiscal year, Okay, alright, good and how are you anticipating financing, Thailand and Mexico.

From available liquidity.

Okay.

Alright cash flow that's good.

<unk>.

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