Q4 2021 Kimball Electronics Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Kimball electronics fourth quarter fiscal 'twenty 'twenty..1 earnings conference call. My name is Adrian and I will be your facilitator for today's call. All lines have been placed on a listen only mode to prevent any background noise. After the completion.
<unk> 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 and then the number 1 on your telephone keypad questions will be taken in the order. They are received today's call all the speed 2021S. P.
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A replay of the call will be available on.
On the Investor relation page of the Kimball electronics website at this time I would now like to turn the call over to Andy <unk> head of Investor Relations. Mr. <unk> you may begin.
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Thank you operator, and good morning, everyone welcome to our fourth quarter Conference call.
With me here today is Don Charron, Chairman and CEO, and Janet Croom, Vice President Chief Financial Officer.
We issued a press release yesterday afternoon with the results of our fourth quarter and full fiscal year ended June 30th 'twenty 'twenty 1.
To accompany todays call a presentation has been posted to the Investor Relations page on our company website within the events and presentations tab.
Before we get started I would 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 adjusted non-GAAP results for the fourth quarter of fiscal 2021. This excludes the onetime after tax expense totaling zero point $3 million of 1 cent per diluted share associated with non operating items.
Reconciliations of GAAP to non-GAAP amounts are available on our press release.
This morning, John will start the call with a few opening comments.
<unk> will review the financial results for the quarter and the full year fiscal 2021 and guidance for fiscal 2022, 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 operating results for the fourth quarter and the strong finish to a record setting fiscal year 2020 of them.
Our team remains laser focused on fulfilling the commitments made to our customers as we work through the ongoing challenges.
During the pandemic and the global part shortage.
Despite the headwinds we delivered strong top line day. Thanks.
As for margin expansion and impressive earnings day with average.
The income exceeding our goal of 4.
The 5%.
For the fourth consecutive quarter, and adjusted Q4, EPS, increasing 71% over the same period last year.
Good day fiscal year 2021 was a record year for our company with many financial metrics, including net sales margin rates earnings.
Cash flow from operating activities and return on invested capital, reaching all time for me.
Our team has demonstrated remarkable resilience throughout these unprecedented times.
And we are well positioned to carry the momentum kind of 2021 in the fiscal year 2022.
As a result of the ongoing semiconductor shortage of portion of our shippable backlog continues to shift out ahead of us which will likely result in 2 very different halves in fiscal year 2022.
Our full year guidance, which Janet will discuss in a few moments current.
On page this type of application as we expect the material supply to steadily catch up if customer demand throughout the first half of fiscal year 2022.
Tabling of the shift the majority of the surplus backlog in the second half of the fiscal year and into fiscal year 2023.
We expect of catching up on the backlog combined with strong organic growth for new and existing programs will provide significant year over year growth.
Yeah on the record setting results for fiscal year 2021, and the bullish outlook for fiscal year 2022, we have never lost sight of the fact that the health and safety of our employees.
Number 1 priority.
Our protocols and minimize the stretcher.
For the business kind of light.
The maintaining excellent customer support.
Thank you.
During this period of uncertainty.
Net sales in Q4 increased 15% compared to the same period last year.
This was the stronger finish to fiscal year 2021, and what we discussed 90 days ago on our last earnings call.
The growth of concentrated in our automotive and industrial and medical markets.
Automotive was up 92% in Q4 as compared to a year ago as the industry returns to more normalized levels of value. After the shutdown of the year ago due to the pandemic.
The business continues to benefit from true industry wide megatrend.
First the demand for vehicle it is red hot as communities reopen from the pandemic and consumers and you have cash into the packet leave their homes and take to the rate to reengage with the diet.
Oems have been responding to the surge in demand by ramping up production to keep pace.
The most degree there's not a foreseeable end in sight.
The second Mega trend is the continued growth in electronics content per vehicle.
The cars and trucks are being designed for advanced technologies and expanded on operating systems.
Advancements, including electronic steering automated driver assistance.
Passenger safety systems.
Or mobility management electronic braking and redundant systems for self driving cars. These are all good examples of this megatrend and represent continued growth opportunities for <unk>.
Moreover, the applications an architecture for the systems are largely the same for both the electric vehicles and vehicles driven by internal combustion engine and the.
The stringent production standards in the automotive industry for the systems aligned well with our core manufacturing competencies.
After making Kimball electronics the supplier of choice.
There is an inherent stickiness of these long term relationships when we win of program.
<unk> is an ongoing stream of orders that allows for the operating efficiency.
You can see this dynamic in our customer base, which gives us confidence on the growth potential of this true.
Medical market in the years to come.
Sales in the industrial vertical increased 17% in the fourth quarter compared to the same period last year with the strength of resulting from automation cash then inspection sales and higher end climate control price.
We expect the strength to continue in fiscal year 2022.
The medical vertical market was down 31% in Q4.
The result of strong prior year sales related to the COVID-19, pandemic and lower levels of electric procedures. This year.
We are starting to see this trend reverse as more of the population of vaccinated and physicians opposite of the hospitals are able to resume elective procedures and activities.
Longer term, we believe the megatrends in the healthcare industry, such as the world of agent calculation, increasing access and affordability of care.
Creasing device sizes and connected drug delivery systems are an excellent setup for the future growth in this vertical market.
And finally sales in public safety were $10.8 million down 10% from the prior year. This is yet another temporary impact of the COVID-19 pandemic as the reduction in sales was primarily related to commercial and hotel smart locking systems. We anticipate this market will return to normal over time as people presume training.
I am so proud of our team and their efforts to deal with the challenges throughout the year.
We have been working diligently of deferring solution to minimize our EBIT on the gate for Glu.
The card shortage. This is a great example of how our strong company culture is creating quality for life.
I'll now turn the call over to Jan on to discuss our results in more detail and lay out our guidance for fiscal year 2022.
Janet.
Thanks, Don and good morning, everyone.
Net sales in the fourth quarter or $329.1 million of 15.
<unk> 15 per cent increase compared to $286.2 million in Q4 of last year.
Foreign exchange rates favorably impacted sales by 3 per cent and the fourth quarter of 'twenty 'twenty 1.
Our gross margin rate in Q4 was $9.7 per cent, a 240 basis point increase from the fourth quarter of last year.
Driven by improved operating execution higher sales volumes in the automotive vertical.
John highlighted and favorable foreign exchange.
Adjusted selling and administrative expenses were $13.8 million of end of fourth quarter of 3.7 million of 0.7% of net sales compared to the fourth quarter last year.
This increase was primarily driven by salary and payroll related costs and higher profit sharing on it.
As a reminder, adjusted selling and administrative expenses exclude changes in fair value of our syrup liability.
That's directly offset in other income and expenses.
Changes in the fair value of the Serp investment.
Adjusted operating income for the fourth quarter was $18 million or 5.5 per cent of net sales.
This represents an improvement of $7.2 million of 1.7 per cent of net sales when compared to the same period last year.
The increase was driven by the higher gross profit that I, just mentioned, partially offset by the change in selling and administrative expenses.
Other income and expense was income of point of $4 million in the fourth quarter, which compares to expense of $2.7 million in Q4 fiscal 2020.1.
The income this year, resulting from gains on certain investment and favorable FX, partially offset by net interest expense and all other expenses.
The effective tax rate in Q4 was 17 point the first day.
The low effective tax rate in Q4 was primarily driven by a favorable mix of earnings and our various tax jurisdictions.
Adjusted net income in the fourth quarter of fiscal year, 2021 of $14.7 million for 58 cents per diluted share.
Per to adjusted net income in Q4 of last year of $8.5 million for 34 cents per diluted share.
Dan noted this represents a 71% improvement in EPS year over year.
Now turning to the balance sheet.
Cash and cash equivalents at June 30th 'twenty, 'twenty, 1 or $106.4 million.
Cash flow provided by operating activities. During Q4 was $26.3 million, our fifth consecutive quarter of 20 million plus.
Cash conversion days for the quarter ended June 30th 2021 for 64 day.
Representing a 17 day improvement from Q4, 'twenty 'twenty and day to day improvement from last quarter.
Compared to Q4, 'twenty 'twenty, we experienced improvement in contract asset days and production day supply on hand.
Capital investments in the first quarter were $15.9 million largely to support the launch and ramp up of new programs and to support our facility expansions in Thailand and Mexico.
We continue to study our capacity needs to support growth plan.
As highlighted on our Q3 call, we anticipate higher levels of Capex to support the expansions of our operations in Thailand, and Mexico over the course of fiscal year 'twenty 'twenty 2.
Well the expansion to add much needed capacity to support the forecasted growth from both existing and future customers and demonstrate our strong organic growth opportunity.
Borrowings on our credit facility as of June 30 of 2021 were 66 million, which is down from $118 million a year ago.
Our short term liquidity available represented as cash and cash equivalents plus the unused amount of our credit facilities totaled 207 million at June 30th 'twenty 'twenty 1.
Yeah.
The purchased in the fourth quarter of fiscal year 'twenty 'twenty 1.
Since October of 2015 under our board authorized share repurchase program of total of $79.7 million, what's the return to shareholders by purchasing 5.3 million shares of common stock.
As Don highlighted the full year fiscal 2021 was record setting for our company with the number of financial metrics, achieving all time high.
Net sales were 1.292 billion on 8 per cent increase over the prior year.
Adjusted operating income was $5.2 per cent of net sales a 180 basis point improvement from fiscal 'twenty to 'twenty.
Adjusted net income totaled $56.4 million compared to $28 million last year.
And adjusted EPS was $2.23 more than double fiscal 'twenty 'twenty.
Included in the results. This year was the favorable impact from foreign currency rate movement, which resides in other income and expense.
Excluding this impact of the 17th and the adjusted net result for fiscal 2021 of $2 and fix the what's still well above the dollar and Tencent, we reported a year ago.
We generated $130 million of cash from operating activities and our return on invested capital reached 13.1 per sat.
First in our history.
Now turning to fiscal 'twenty 'twenty 2 for.
For the first time in our company history, we are providing guidance for the full fiscal year.
We estimate net sales will be in the range of 1 point for to $1.5 billion and 8 per cent to 16 per cent increase over fiscal 'twenty 'twenty 1.
Operating income margin is expected to be for 5 to 5 per cent of net sales.
And finally, we expect to invest $60 million to $70 million in capital expenditures in the fiscal year.
I'll now turn the call back over to Dawn.
Thanks Jana.
Before we open the lines for questions I'd like to take a moment to reiterate how proud I am of our T V.
Posted excellent operating results for the fourth quarter, despite meaningful headwinds and finished a record year with strength.
We are also well positioned to carry the momentum into fiscal year 2022.
Hi, dieting for growth.
The company is in a solid position and we are committed to build success in the future.
With that I would like to open the lines for questions.
Operator, do we have any analysts with questions in the queue.
As a reminder of if you will like to ask a question press. The star 1. The first question comes from the line of Anna saw strength with Sidoti.
Hi, everyone can you hear me.
Yes, we can on yet.
Thank you for taking my question on congratulations on a strong quarter on year, despite the challenging environment. Thank.
Thank you.
I I I guess the fell off the call that you you talked about the auto industry, and then and I assume you're talking about the industrial Ah you saw strength in the G ASUR on them.
And the climate control side.
Is that correct for.
Yes, that's correct.
And then what do you see on tests of the smart metering over in Europe, I would assume that the time of control is driven by our by the Covid and people going back to the offices at the end.
And hotel on everything opening of optimistic I'm all for that.
Controls.
Might be pulling back the elevation of Mike about the I'll start maybe normalize for some of the smart metering in Europe was coming on board.
How should we think about the other.
Growth in the industrial.
Yeah. The you know the smart.
The smart metering business in Europe is still being held back by the pandemic.
And so it will it will require quite a bit of change yet in terms of the environment there in Europe and in being able to have access for installation purposes of those smart meters. So we're anxiously watching that business and hoping for its return, but it's a it's.
Absolutely related to.
Getting this pandemic behind us before we would see let's say pre pandemic run rates.
Yeah, the rest of our business in the industrial vertical remains healthy climate control on a number of areas remains healthy and as you said you know automation test and measurement of Q4 is their strongest quarter.
And they had a strong quarter in Q4 this.
This year. So we you know we expect the.
Industrial vertical to continue to be strong for us as we go forward.
Okay, and what do you see on comps of the medical on the elective.
All of that.
The growth there Hum.
How is that trending throughout the quarter.
What we're seeing we're seeing signs of improvement in that that the that the trend. There is improving in terms of those products, we build to support those elective procedures and surgeries. So we're optimistic that that trend will continue of course, you know with with the new Delta variant and and the.
Sort of concerns around that or we're hoping that what we've seen in the past quarter in terms of.
The positive trend doesn't get reversed year this quarter.
But so far so good where we're seeing a nice positive trend in terms of the return of that business its going to take some time, we believe.
But it's definitely trending upward.
Okay. Thank you.
And Michael on based upon the call about the SG&A for the quarter, what's the beat all of it I think it was good to follow me on.
On the performance bonuses, how shall we think about back in EBITDA going forward.
Yes, you're right that's exactly what caused that number to move up you know I think you know obviously with the guidance the full year guidance that we've provided.
You know the for the 4.5% to 5% operating income margin, that's really where I'd like you to focus obviously that requires you know gross margin.
To be higher than SG&A by that range and so rather than trying to give you an SG&A number on a gross margin number I'd I'd want you to just focus on on that range of operating income margin between 4.5 and 5.
Okay. Thank you that's helpful.
Yeah.
The amount of sure working capital very well on building out for quite some nice cash luckier than on.
The content could generate good cash.
What what are you thinking about the use of cash going for.
Well first and foremost supporting our organic growth.
As we announced in previous calls and reiterated today, you know the expansions much needed capacity expansions in Thailand and Mexico.
Funding those types of expansions to support what we see is the very strong organic growth.
The funnel of new opportunities and just.
Just a comment on of the working capital what I'm, just so pleased with the results this past year.
You know the improving our cash conversion cycle.
Structurally now with these improvements this year, we're about where we expect the business to run you know for various reasons that we've talked about.
In previous quarters, we we had higher inventory levels for example, and we explain why.
But with the work we did this past year I think structurally with the cash conversion cycle.
Yeah, Yeah cash conversion days being at 64.
Structurally that's where we expect the business to run.
So going forward you know the working capital in dollars will will increase commensurately with the top line growth.
So that's a funding need as well when we think about growth going forward. It's not just capex. It's it's having that working capital grow with that top line and that absolutely is our number 1 priority for capital allocation.
Okay.
Okay. Thank you that was all for me.
Thank you on your.
Again, if you would like to ask a question press Star 1. The next question comes from the line of Mike Morris with Walton housing and company.
Hey, good morning, Don Good morning, again, and thanks for taking the question more on like Mike.
So I'll echo the congratulations phenomenal work on the strong quarter on the great year, especially with everything that you and the rest of the industry has had to deal with it.
Really great numbers of your folks to put up.
And I kind of want to start on understanding you know just how you guys did that certainly dealing with tight supply changes in your guidance DNI and that's what you do.
Thinking about the last quarter, there were concerns about <unk> some of the supply chain. It seems like you've navigated through that without too many of that of those happening.
Volume was putting together the outlook materially changed at all from what you were seeing last quarter, either positively or negatively.
While we are in the whole, let's say semiconductor shortage area, we've seen areas of improvement.
We've actually seen some areas that have gotten worse.
So it's a bit of a mixed bag.
I think as I mentioned in the last call. We're fortunate in that you know many of especially on our automotive business. Many of the vehicles that we have content on through our customers are our priority vehicles vehicles that are getting priority with the with the chip shortages that that helps but it's been impactful and as we.
You mentioned you know, we Havent fair amount of shippable backlog that continues to move out ahead of us and we're trying to manage that the best we can the other words organizing ourselves and planning ourselves around the gate the gating item.
We spend a lot of time of our operations team has spent a lot of time trying to get that right.
That's a lot of extra work, but it helps to minimize the disruption of the shortages.
It's hard to put an exact number on the shippable backlog. That's rolling out ahead of us, but when you think about our guidance for the full year in that $1.4 billion to $1.5 billion range. As you know Mike We we've had a target of growing the business around 8% organically.
So that's sort of the low end of our range of the high end.
Really contemplates catching up some of that surplus backlog.
So it gives you a kind of of idea of how much that shippable backlog how much of in dollars. That's moving out ahead of us. So that's something we really want to watch carefully have a good plan to catch up on so that you know we can continue to support our customers. The way, we have been and yeah get them back to.
The inventory levels, they need to execute their plans as well. So it's we're not out of it the first half of fiscal year 2022, we believe is going to continue to be challenging.
With these parts shortages and we're gonna have to do what we did last quarter for a couple more quarters before you know we could expect that yeah of the supply would catch up with demand.
That's why we're talking about you know 20 to be in the 2 different halves for us and you know we're we're optimistic it will improve most most analysts are predicting that the situation will just continue to improve over the next couple of quarters.
And we're hopeful for that.
Because that would really allow us to to again focus our energies on on.
On the other aspects of running the business.
That's really helpful.
And then your response, there you kind of touched on guidance, which I'd like the turn to.
As a shareholder really appreciate the business being at a point, where you guys are comfortable going out and putting these numbers out here.
I think that really speaks of the testament to the improvements that you guys have made more of the businesses that day.
Thinking about the targets that you spoke of laid out.
Historically, when you've talked about that topline growth at 8% on an operating margin target of around 4.5 per cent you mentioned it in your response just before that those are now kind of the low end of the guidance that you've put out.
So my question is as we think about longer term targets.
The outlook for the business.
Is that for 5% operating margin target that you guys talked about in the past should we now think about our long term target of about 4.5% to 5%.
For you now is there an opportunity for you guys to revisit and talk about longer term targets beyond that.
How are you thinking about it.
On the whole amount.
We're definitely staying on the operating income target as you know, we we put that target out there for ourselves most of the lease be a few years ago, a quite a while ago at least and and we pushed ourselves hard to get there and to get there on a more consistent basis with with real improvements in our operations better operating leverage.
Better use of our footprint.
You know really focusing on the things we have to do to truly make those improvements that we could then predict going forward.
Our teams have done a great job and despite all of the headwinds we talked about the pandemic and the shortages.
We believe that we've made the sustainable improvements in our in our factories and in our supply chain activities now we're still battling some of those things that other manufacturing companies. The companies are battling you know whether it's the worker shortages increases.
And wages and salaries and and other inflationary costs for them around raw material, but we believe we've made improvements that are sustainable were going to work our way through those issues and we think it's time to raise our expectations from that for 5%.
Target that we put out there.
All of those years ago and M. B N V and that that you know that landing area. If you will between 4 and a half of 5 on a consistent basis and we were just really tackled this year to be able to finish the full year with all 4 quarters about 4 and a half and that we had to prove that to ourselves that we think that those improvements other than sustainable go on.
Forward, but we believe they are.
Great well I think all of that makes a perfect for that.
Don Thank you so much for the color.
Hey.
Thanks, Mike for you too.
Again, if you would like to ask a question press Star 1 that is star 1 for questions.
Yes.
Yeah.
I will now turn it back over to Don Charron for closing remarks.
Thank you 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.
This concludes today's presentation you may now disconnect.
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Net.
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