Q1 2022 Kimball Electronics Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Kimble Electronics first quarter sits called 20 twenty-two earnings conference call. My name is Sylvia and I will be your facilitator for todays 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 Kimberley electronics leadership team there will be a question and answer period to ask a question simply press star and the number one on your telephone keypad.
Today's call November 4th 2021 is being recorded.
A replay of the call will be available on the Investor Relations page of the Kimble electronics website.
At this time I would like to turn the call over to end of regret head of Investor Relations Mister regret you may begin.
Thank you Sylvia and good morning, everyone.
Welcome to our first quarter conference call with me here today is dawn, Sharon, our chairman and C E O and Janna Chrome Vice President and Chief Financial Officer.
We issued a press release yesterday afternoon with our results for the first quarter of fiscal 2022.
Two accompanies today's call presentation has been posted to the Investor Relations page on our company website.
Before we get started I'd like to remind you that we will be making forward looking statements that involve risk and uncertainty and are subject to a safe harbor provisions as stated in our press release and the SEC filings in that actual results can differ materially from forward looking statements. All commentary today is focused on adjusted non-GAAP results for the first quarter of fiscal.
2022. This excludes one time after tax income totaling $1.1 million or four cents per diluted share associated with non operating items reconciliations of gap to non-GAAP amounts are available in our press release.
This morning, Dawn will start to call with a few opening comments Jana will review the financial results for the quarter and guidance for fiscal 2022, and Don will complete our prepared remarks before taking your questions I'll now turn the call over to dawn.
Thanks, Andy and good morning, everyone.
I'm proud of our people our company and the results for Q1, considering the difficult operating environment caused by issues in the global supply chain.
Component shortages, which are impacting companies worldwide.
Continue to make it challenging to keep pace with strong market demand.
We were disappointed by the lack of improvement in the overall situation in the September handing quarter, when we were actually expecting some level of recovery.
In fact conditions deteriorated during July August September period, due to increasing infections in Malaysia, and the resulting restrictions and the worsening of the backlog in U S West coast ports.
In addition, during the last week of the period, we were faced with the challenge of power outages at our China facility.
The outages continued into cute too. However, we have identified a solution that will mitigate our risk further production.
As a result of these issues are lost absorption was more significant than original estimates.
It is important to know we are committed to retaining our workforce around the world as we see these disruptions as a short term issue and our final a new product introductions remain strong.
For the past 10 months, our teams have been working tirelessly to navigate these challenges and we continue to experience a shift and a significant portion of our shippable backlog as customer demand exceeds parts availability.
As supply constraints ease, we are well positioned to ramp production on our record backlog and support our strong funnel a new product introductions.
In fact, we're preparing to run at maximum capacity on several production lines across the company.
We function as a single source for many of our customers who are relying upon us to deliver.
On a contractual agreements once parts become available.
We are reiterating our guidance for fiscal year 2022.
Although the bifurcation between the first and second half of the fiscal year will now be more pronounced <unk>.
Longer term the outlook for a company continues to be strong and the team we haven't place to execute on a variety of growth opportunities is up to the challenge.
Pivoting back to the first quarter net sales were down 12% compared to the same period last year with declines in three or four vertical markets.
Automotive was the only major vertical market with sales increasing in Q1 up 9%.
Based on customer demand in our backlog.
This result could have been much stronger if we had the materials needed to fill these orders.
But unfortunately that was not the case.
The Q1 grow up an automotive resulted from popular vehicle models designated as high per hour priority by our customers and the Oems receiving an allocation of components from the limited worldwide supply.
When the global supply chain issue subside, an industry wide volumes normalize we are still bullish on the growth prospects of this vertical market.
Electronic content per vehicle continues to increase with advanced technologies and expanded operating systems being added to most vehicles.
As I've mentioned in previous calls the applications an architecture for these systems are largely the same for both electric vehicles and vehicle is driven by internal combustion engine and the stringent production standards in the automotive industry align well with our core competencies.
Which gives us confidence in the growth potential of this vertical market in the years to come.
The medical vertical market was down 33% in Q1.
As you will recall, our sales were strong last year with our support of respiratory care products needed to come back COVID-19 during the early months of the pandemic.
This combined with raw material shortages and logistical challenges made for a difficult quarter over a difficult quarter over quarter comparable.
Elective procedures are still below prepandemic levels.
And while we're starting to see improvement as more of the population gets vaccinated.
And physicians offices and hospitals are able to resume these activities the recovery has been gradual.
Longer term, we continue to believe the Mega trends in the health care industry, with an ageing population and increasing access and affordability to care.
Decreasing device sizes and connected drug delivery systems are an excellent setup for growth.
Turning to the industrial vertical market, which was down 9% in the first quarter. The decline resulted from lower sales in our climate control and smart metering products.
Both again largely related to parts shortages.
And finally sales and public safety were $11.1 million.
Where $11.1 million down 16% from the first quarter of the prior year again, largely driven by park shortages.
I will now turn the call over to Janet to discuss our Q1 results in more detail and review our guidance for fiscal year 2022.
Janet.
Thanks, Don and good morning, everyone.
Net sales in the first quarter for $292.7 million.
At 12% decrease compared to $331.7 million in Q1 last year.
Foreign exchange rates heavily impacted sales by 1% in the first quarter of fiscal 2022.
Our gross margin right in Q1 was 5.3%.
A 390 basis point decrease from the first quarter of last year.
The decline was driven by a combination of factors.
First certain costs have increased this year, including wage inflation and other labor costs and inbound freight.
Second and more importantly, we were challenged by lower volumes related to the continued global part shortage, that's impacted our absorption rate at fixed costs and required labor level to support the back half of our fiscal year and beyond created margin pressure.
We expect this to abate in the coming quarters and into the future as the part shortage subsides and we are able to return to normal sales volumes based on a funnel of future growth.
Adjusted selling and administrative expenses were $12.3 million or 4.2% of net sales in the first quarter.
This compares to $12.6 million or 3.8% of net sales in Q1 last year.
The increase in the expense right that is expenses as a percentage of sales as a resulting from the lower sales volume in Q1, this year as compared to laugh.
Adjusted operating income for the first quarter with $3.3 million or 1.1% of net sales.
This compares to adjusted operating income of $18 million or five 4% of net sales in the first quarter of fiscal 2021 well.
With a decrease resulting from lower sales volume and the corresponding lost adsorption that Don noted in his opening comments.
Other income and expense with expense of $1.2 million in the first quarter, which compares to income of $2.1 million in Q1 of fiscal 2021.
This change was mainly due to impact as FX game loss due to foreign currency Remeasurement.
The effective tax rate in Q1 was 27, 4% compared to an effective tax rate of 15.7% in the first quarter last year.
The lower effective tax rate in the prior year quarter with favorably impacted by a discrete tax benefit from a state tax valuation allowance and a favorable mix of earnings within our various tax jurisdiction.
Adjusted net income in the first quarter of fiscal 2022 was $1.5 million or six cents per diluted share compared to adjusted net income in Q1 last year of $16 $6 million or 65 cents per diluted chair.
Now turning to the balance sheet.
Cash and cash equivalents at September 30th 2021, or $89.3 million in cash flow used for operating activities. During Q1 was $8.2 million.
Cash conversion days for the quarter ended September 30th 2021, where 73 days, representing a three day improvement from Q1 2021.
However, it is a nine day increase from last quarter.
We saw a significant increase in inventory and the amount of $62 million in the quarter. A result of the current part shortage.
In several cases, the majority of parts were available and arrived on time only to be held up from being released to production due to a few critical parts not arriving on time.
This is caused a shift in our inventory build specific to the current environment.
There was a notable correlation between the inventory build we experienced in the quarter and the absorption rate that Don noted, which resulted in lower L. I margin.
As the part shortage debates and we work down the backlog is open orders, we will likely see inventory levels normalized.
Capital investments in the first quarter, where $12.7 million largely for expansion that are Thailand in Mexico facilities and to support New business Awards.
We anticipate higher levels of Capex over the remainder of FY 22, as we continue these expansions and support our strong organic growth opportunity.
Borrowings on our credit facilities at September 30th 2021 for $72.6 million down substantially from 110.5 million at September 30th 2020, and up slightly from $66 2 million at June 30th 2021.
Our short term liquidity available.
Represented as cash and cash equivalents plus the unused amount of our credit facility totaled $182.8 million at September 30th 2021.
There were no shares we purchased in the first quarter of fiscal year 2022.
Since October 2015 under our board authorized share repurchase program. A total is $79.7 million was returned to our share owners by purchasing 5.3 million shares of common stock.
As dawn highlighted we're reiterating our guidance for the full year of physical 2022.
As a reminder, we estimate net sales will be in the range of $1.4 billion to $1.5 billion and 8% to 16% increase over fiscal 2021.
Operating income margin is expected to be 4.5% to 5% of net sales and we expect to invest $60 million to $70 million in capital expenditures in the fiscal year.
Finally, I want to call your attention to the Investor Relations section of our corporate website we've.
We have recently refresh the site to improve the navigation and increase the availability of information and hope you will find these in him enhancements helpful.
I will now turn the call back over to them.
Thanks Jana.
Before we open the lines for questions I'd like to share a few thoughts in closing.
The operating environment, we are facing today is unlike any other I've experienced in my 35 plus year career.
The impact of the pandemic and the resulting material shortages Cup.
Coupled with global logistics issues and rising costs is presenting a unique set of challenges for companies and a wide variety of industries around the world.
I think that it is important and apparent that we realizing our company reported a record fiscal year.
In 2021 during the height of the pandemic.
Only to face this incredibly challenging operating environment when the pandemic appears to be subsiding.
There are many imbalances within the global supply chain that need to work themselves out before we can return to some type of normalcy.
But as I referenced in my opening comments, we have a long-term perspective, when running our business and view these headwind as short term in nature.
Our backlog of open orders is at record levels and we are prepared for a significant ramp up in output in the second half of fiscal year 2022.
Throughout this period of uncertainty we have never lost sight of the fact that our number one priority is the health and safety of our people are.
Our protocols to minimize disruptions to the business and allowed us to maintain excellent customer support.
We're well positioned for the future and I'm, so proud of the team and their efforts to deal with the challenges from this tough operating environment.
We are truly focused on creating quality for life.
As previously announced our annual meeting of Shareowners will be held at nine am Eastern time on Tuesday November 9th.
This meeting will be an in person only event at our world headquarters here in Jasper.
We appreciate the support of our shareowners and look forward to seeing any of that can attend.
If you are unable.
A copy of the presentation from the meeting will be posted to our corporate website and the Investor Relations section.
With that I would like to open the lines for questions Silvia do we have any.
Analysts with questions in the queue.
As a reminder to ask a question. Please press star one on your telephone keypads you're.
Your first question comes from on your soda stream from <unk>.
Hi, and thank you for taking my questions.
First is there no and can you put in the number on the backlog.
Well, yeah last quarter on Yeah, we reported at the end of.
June 30 quarter, we reported that open orders backlog of open orders rose to $749 million, which was up 78% from the same period prior year and will update those numbers when we issue our queue.
But up substantially obviously.
And I think.
Coincides with what we've been talking about we've got a lot of orders that we would like to ship that we need to ship to our customers.
Once these parts arrive.
And how to what extent do you view this orders as nonperishable is there any risk that you will you will lose some some revenue.
We haven't seen signs of the demand going away or <unk>.
Diminishing or going away altogether, we have not seen those signs our customers are indicating this demand is real they need it they want to build it and ship it and in our case many of the contracts that we have with those customers. We are the sole source for those products for them and so yeah.
That's why we are preparing hard right now to make sure and the second half of the fiscal year. We can run we can run at run rates that are 30% to 35% higher than what we're running out today.
Just to keep up with the demand that we're facing and again that demand includes.
Catching up to orders that we should have shipped in prior quarters, and the and new product introductions. We we have been very successful winning new business and getting material in to support those NPI as in the second half is also very critical to our plan.
So so what's going on it doesn't it hasn't been so what's going on nine the current environment hasn't really slowed down and your ability to win new program, Sir constantly concerned so I'm on your customer Sir.
Hesitation. It has not we we feel very fortunate the success that we've had to grow with existing customers by by winning new programs and we've also one new programs from new customers. So we're very pleased with with our new business wins.
During this last period.
Okay. Thank you and then in the industrial she said it was not an and lively last thing you needed to do too and the component shortages, but how's the climate control. The complaint is there turned it in Europe is do you see the demand coming back there, it's it's still a bit challenging.
I think overall and climate controls for both North America and Europe. The demand is there.
Especially here in the U S. R. R climate control customers would take everything we can produce.
The one area, that's still sort of in a gradual recovery mode. We would say smart metering in Europe, which is not part of climate control necessarily.
But that is an area that's still just gradually recovering from the pandemic.
Okay. Thank you and then how do you work around the inflationary impacts.
Well, we first and foremost we want to make sure. We're we're well aware of those inflationary impacts and making sure we're doing our homework to to try our best to understand which ones are temporary.
In nature, and which ones really need to be thought about as a new part or increased part of our cost structure and so we we have teams that are studying that very closely to the extent, it's a permanent part of our cost structure that we can't offset by other.
Let's say cost innovation.
Projects et cetera, then.
Then we will pass those through to our customers our customers have been very reasonable during this period.
And even in cases, where we've had premium is we've paid for material or premiums we paid for logistics.
Our customers have been very reasonable partners with us in.
In reconciling all of that and passing it through when needed.
Okay. That's comforting that was all for me for now I'll jump back into queue. Thank you and thank thank you on you.
Your next question comes from Mike Moralez from won't hate.
Hello, Mike wearing my Hey, good morning, good morning folks thanks for taking the questions. So first of all Andy Don agenda. Congratulations on the refreshed I our website I'd like to say you know with the important that you folks have made to the presentation materials over the last few quarters I really think it's making a story more accessible both for existing holders like asking prospective holder.
So keep up the good work there.
Thank you.
So hey, you touched on this a little bit Jana Uhm I'd like to circle back to kind of some of the moving parts and supply chain in the quarter, because I think it's kind of meant different things for different companies and Don you'd mentioned that it sounds like the parts availability issues were much more of a headwind versus.
Port congestion or shipping issues.
Is that accurate and then any way you can maybe quantify that or.
Just help us think about the different moving different moving pieces between supply chain shipping and then maybe some of these facilities specific issues in China that you mentioned.
Yeah, I'll I'll start and then I'll, let Janet build on my comments.
Mike.
I I would start with looking at.
Inventory growth during the quarter $62 million.
It doesn't jump off the page as much when you think about production days supply on hand, although it was significant increase sequentially from where we ended just a quarter ago in days as well as dollars.
But I think that would give you sort of an idea of how much we were planning to ship in the quarter and what what we actually ship because recall last quarter I talked about trying to align our scheduling with the supply base and our customers with reality.
With reality of the situation and what material would be available and so when we said we were disappointed by the fact that there was.
A lack of improvement there was no improvement it got worse it got worse because of the infection rates rising in Malaysia, which brought on restrictions as you know in that part of the World Southeast Asia in general.
Many semiconductors rely on that geographic region in their value streams, especially the back ends of their processes and so when those restrictions went into place it was immediate and impacted us in the way of what we thought we would get which was still restricted supply was not as.
If we thought we were going to get to full recovery mode. We were expecting it would still be restricted restricted supply, but it actually got worse.
As we work through not only those restrictions that those suppliers had in Malaysia.
The government.
Reaction to the increase in infection rates, what led to those restrictions, but ultimately we also were impacted by the growing backlog at.
The U S West Coast ports, which I know you are well aware of it as well as significant backlog and whether it's ships waiting to dock or trucks waiting to pick up the off load. It was a problem all quarter long power outage in China is a little more later in the quarter less of an impact.
But when you take those other factors I mentioned developments in the quarter.
If things got worse, not better and again I would just point to the 62 million dollar increase in inventory.
That we maybe we were maybe not expecting to ship all of that in the quarter. Some of it might have been part of our queue to recovery plan, but a significant portion of that we were expecting to go out the door and hence we had the people the machines.
The process is set up to to start that recovery. So it was disappointing to us.
And we wanted to make that clear to all of you.
Yeah, the only thing that I'll add to that is we are paying close attention to our working capital needs and will be over the next 18 months because it's the balance that's done indicated inventory.
Inventory sitting waiting on a certain part to come in so that we can shoot and chat as well as the inventory build that we need to support the launch of our Thailand facility. That's anticipated in January and then our Mexico facility that's.
Happening in June and so the timing of those the corresponding inventory, though to required for that all of those new product introductions that are going to be going into those facilities as well as the backlog of orders is going to create a working capital dynamic.
For probably the next.
Would say six to 12 months.
And several of January you read my mind and cash Yeah. It's just it's it is the strangest thing and that I can't give you for the next 12 months clear line of sight into working capital needs. What I can tell you who is I've got a balance sheet built for it which I'm very very <unk>.
Right before and we will certainly manage through it.
And then in terms of forecasting for their future, it's really going to be about mpi's expansions et cetera, but right now it's it's really just out of sorts.
Understood. So maybe directionally is it fair to say that longer medium to longer term inventories probably settle somewhere between you know if I think about the <unk> commentary last couple of quarters lower than where you would've liked versus where we are today.
Somewhere in between those two points considering the higher demand levels in the working capital need some of these a facilities or expansions rather that there you've got it yet.
Understood Great maybe switching gears you know.
In the past you've spoken about high utilization across the footprint and obviously that informs the decision on the facility expansion you've mentioned and thank you for mentioning the timing as well data on those again I'd like to dig into a little bit more on how you guys are thinking about the implied ramp in the second quarter, there and maybe give you folks the opportunity to speak more to your decision on maintaining staff.
Levels, and how that will support that ramp and you know Dom thinking about your experience is this ramp going to be meaningfully different than ramps you've seen in the past when there's been tightness like say MLC sees a couple of years ago, just help us understand how you were thinking about that.
You have a really good question.
Think it.
Answer the last part of that first.
It does depend on how fast the supply chain recovers how fast the suppliers recover.
If it's more of a step function.
Recovery, which I doubt it will be I believe it will be a gradual steady improvement.
From from the supply base and I think we are well equipped to handle that a step function would be much more difficult.
To handle but but look like I think when you do the math on what we're seeing what we're saying and what we're seeing in terms of reiterating our full year guidance.
We gotta be running at 400 plus million dollars quarters.
To keep up with the demand and work a little of this backlog off so.
Again, we're expecting gradual but steady improvement in the quarter were in.
So far we've seen some bright spots, but it's gradual.
Seems to be better than the September ending quarter, we'll see as we get further into it.
And obviously, the pandemic subsides and suppliers are able to.
Yeah recover their operations to prepandemic levels and beyond.
So I think we do see that strong bifurcation.
From a 300 million run rate kind of thing to $400 million run rate on a quarterly basis.
We can do that we.
I as I mentioned I'm, so proud of our teams around the around the world we talked to so many cuffs customers, we talked to so many suppliers and many of them have not only material shortages. They have they have worker issues.
That they are facing and we feel very fortunate that our workers are engaged they're committed.
Staff to handle this ramp up.
And they are ready for it if we can get him to parts, they're ready for it and I think that's just a strong testimonial of the the people we have around the world on our team and and their and their commitment and it's it's a strong testimonial really to our company culture and so while we don't we don't have an answer for all the <unk>.
Shortages right now.
Expect them to get better we have focused our energy on our people, making sure. We got the capacity to get to these new run rates and I feel I feel confident we will be able to keep up with the recovery on the supply base side with our operations producing at these higher levels.
So Mike you have to make a trade off in a decision point as a leadership team to say.
Am I going to impact gross margin in the current quarter by retaining my skilled workforce.
Knowing what I've got coming not just for the back half of this year, but for the future just carry it.
And that's an easy decision to make right you're right in your company for the long term it takes a while to onboard a worker train them get them certified in that to speed and so when you you've got that workforce in place knowing what were staring down.
You keep that workforce.
We did not have one part.
Part that didn't ship due to a shortage of workers and I know not every company can say that.
Ours was purely park.
Understood and all of that is helpful.
Kind of understanding how you guys are thinking about the long term and hopefully continuing strong demanded that you're seeing and maybe my last question on that point thinking about the new square footage, that's coming up b at the facility expansions.
The first question is I guess is any of the demand bits in backlog right now expected to be served via those facility expansion and maybe just in a broader sense in the past you've spoken about difficulties with high utilization on.
Walking a customers or potential new customer through the facility and it's difficult to sell that if you can't point to where their line is going to go and you have that available space. So as the square footage comes online how do you balance utilizing the new space between existing business versus saving summit earmarking it for new business that maybe.
You've been trying to win are expecting the web thanks.
Good. Good question, we are when we make those expansions we are sort of looking at birds, we feel like we have in hand, and birds were still out there hunting so.
It's a mixture of both we are we are talking with our customers, who truly our partners and asking them to make soft commitment. So we can make soft allocations.
Two future capacity needs and we're out three to five years in many cases in those conversations with those customers and so it's a mixture how much of our current backlog is pointed at plants that are built our expansion plans that aren't finished the good news is both expansion plans baltics expansion to themselves.
Struction is is on schedule if not a little ahead of schedule. So we we feel good about where we're at in terms of have an occupancy available in time to put NPI is in place and those expansions that are targeted for those.
Those new expansion area. So so it's fairly well aligned and tightened up.
We're going to be in a better position with more widespread to sell into it is as I've said in the past.
It is a challenge to convince especially a new customer.
Two two awards your business when they can't see where their production lines will go it's just as simple as that and.
But once you start those expansions for example, once the board approved those expansions in Thailand in Mexico, and you can talk more definitively about.
The breaking ground in the actual timeline for when you expect to get occupancy it alleviates that a lot of that pressure and so we we benefited.
Going back a few quarters ago, when we actually approved and launch those expansions and as we ended as we ended fiscal year 21.
Without those expansions we were approaching some of the highest levels of floor space utilization, we've ever had in the history of the company and it was really in all regions Europe, North America, and Asia, and so I think for the for the short term and sort of medium term.
We we feel like we're in pretty good shape for Asia, and North America Europe is going to be next.
As we look at sort of available space to support our business development efforts, we've been very successful there in winning new programs.
You know Poland was practically full to the rafters. That's why we did Romania and now five six years into Romania, It's nearly full as well and so that's a that's a good news.
Sort of challenge that we have but we have to look at our footprint in Europe and we have also been very successful in China, especially supporting customers that are supporting the electric vehicle market there in China so that.
That'll be something maybe a few years out but on our horizon and so.
Yes.
I'm not a big fan of average sales per square foot or average annual sales per square foot, but we were kind of look at that and as at least a proxy.
Two how much square footage do we think we will have to have somewhere in the world somewhere in our footprint to to to have a a pathway to get to 2 billion.
An annual sales.
Understood on the agenda. Thank you both so much for taking all the questions and all the color looking forward to speaking with soon be well. Thank you Mike.
At this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypads.
Your next question comes from Handy Santo from Gabelli funds.
Good morning, Dawn good morning Jenna.
Low handy.
Oh.
Would you share how you rang the level of parts shortages and expected recovery timing among different <unk> like in other words like <unk>, so great levels greater levels of parts shortages, and which ones may see recovery sooner damn auditors.
That's a good question.
With a quarter. We just finished it seemed like the parts shortages just spread across all verticals and all product categories was hard to find an example, where there were no parts shortages.
Really as we exited the September Nd quarter Handy, it's really across the board I think some may take longer to recover.
I believe the automotive vertical overall is probably experienced the longest period of shortages as a vertical and there are some sort of reasons why that is the case I won't go into those but the fact that they have been added longer means they've been working last longer at the real.
<unk> getting at the real sort of root causes in the real solutions and so I think that we'll see how that vertical recovers.
And I I think the other part of that story with automotive because I think those Oems those car makers had to make harder decisions about shutdowns than other verticals and what I mean by harder decisions about shutdowns I mean, there's there's sort of unprecedented consecutive days.
In a row of car plants being down and even amongst the most popular name plates and brands in the world.
Almost all had to announce some reduction in their production plans and and and some sort of shutdown of their car, making plans and I think that they were very careful and thoughtful about how they did that and so as.
As those car plants are coming back online and running building cars that.
At the levels they were intended to build that there.
With that recovery will see that recovery I think is going to get some more traction here.
As we go into the January February timeframe provided again at the pandemic doesn't come at US again with the new variant in a new infection right.
I think it's it seems like that structurally ready to happen inventory levels are very low I think carmakers are going to be willing to build up those inventory levels.
Because the demand is there and so I expect even after the supply to catch up to demand on the components side.
It's not only just the run rate of the market.
Replenishing inventory levels. There. So so that that to me is looking a little bit different than let's say the medical vertical which we're also very bullish on.
Important part of our growth plans going forward and restricted by components.
But also restricted in other areas outside of components. We mentioned again you know.
Elective procedures electric surgeries, and really maybe a better term would be scheduled procedures.
Mckenzie.
Did a study.
They're not too long ago talking about the the backlog of these elective procedures that was created by the pandemic and I think over 1 million. The number they estimate adult over 1 million surgeries didn't happen that should have happened.
And how do you catch up on that given.
That capacity of health care here in the U S. For example, doctors facilities hospitals, how other health care workers, how fast can they get back to Prepandemic levels, and then how can they get above that to to to work down that.
Number of patients, who just simply didn't get that care during the pandemic that that might be gated on that side of the recovery plan in other words parts could catch up but our customers and we're in the value chains of several of those men.
Medical customers striker R. A J and J R.
Or Smith and nephew were in their value chain. So at least we've got insights into what they are thinking about and how they are planning a recovery.
Of sorts.
But then again that could be gated on how fast that backlog can be made up.
Along with parts shortages. So just a couple of different examples there overall I think though it's the whole supply chain.
The disruption the shortages is wide enough I can't really speak definitively about one vertical getting better faster than the other.
And then I'm done I'm, sorry, if I missed this you talk about the inflationary impact.
Dawn and Jenna would you be able to quantify the impact of higher combo, none in faith cause on on your operating margin and how do you plan to introduce price increases.
We can't give you specifics on on what the freight impact.
Increases due to incoming freight or outgoing free candy because again.
Our customers have been really good partners to us and.
They have been very reasonable and rational in terms of helped.
Helping us through these higher than normal cough.
Especially.
While we're trying to figure out is it is it going to be a permanent change in the cost structure or is it kind of go back to where it was and so.
We're working with them to pass through a lot of those exceptional.
Situational situations, we pass that onto them either in a separate inbox invoice or an increase to the selling price of what we produce.
And we're still working through all that with each customer at a different slightly different place.
Depending on how it's significant some of those cost overruns could be so can I give you a specific number as to the impact on the quarter.
And just really want you to know we're working with our customers who are partners on those increases that are going to be here for awhile and I need to get pass through the selling price.
Got it.
Thank you Don Thank you China.
Thanks, Andy Thank sandy.
And I show no further questions at this time I would like to turn the call back to Mr. Dunn Sharon for any final remarks.
Thank you Sylvia and 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.
Ladies and gentlemen, this does conclude today's conference. Thank you again for your participation you may know all disconnect.
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