Q1 2023 Kimball Electronics Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Kimball Electronics first quarter fiscal 'twenty 'twenty three earnings conference call. My name is Sarah smell and I'll be the instruction to teach US, let's say school all lines have been placed in a listen only mode.
Today's call November H, 2022 being the Covid, maybe pay off the Covid 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 <unk>, Vice President Investor Relations. Mr. Herbert you may begin.
Thank you Darius and good morning, everyone welcome to our first quarter conference call with me here today is Don Charron, our chairman and CEO and Janet Croom, Chief Financial Officer.
We issued a press release yesterday afternoon with our results for the first quarter of fiscal 2023 to.
To accompany todays call a presentation has been posted to the Investor Relations page of our company website.
Before we get started I'd like to remind you that we will be making forward looking statements that involve risks and uncertainty and are subject to our safe Harbor provisions as stated in our press release and SEC filings and that actual results can differ materially from the forward looking statements. All commentary today is focused on adjusted non-GAAP results reconciliations of.
GAAP to non-GAAP amounts are available in our press release.
One additional housekeeping item as a reminder, starting in Q1, we have combined the reporting of results for our industrial and public safety vertical markets reclassified amounts for prior periods are available in our press release and SEC filings.
This morning, Dan will start the call with a few opening comments Jana will review the financial results for the quarter and guidance for fiscal 2023, and Dawn will complete our prepared remarks before taking your questions.
Now I'll turn the call over to Don.
Thanks, Andy and good morning, everyone.
I am pleased with our results in Q1, and a strong start to the new fiscal year.
For the third consecutive quarter net sales surged to a record breaking level setting another all time high for our company and operating margin improved compared to the same period last year.
This was in line with our estimates as we ramp up production on new and existing programs and leverage our facility expansions in Thailand and Mexico.
These investments however increased fixed costs that were not fully absorbed when comparing the operating margin rate to Q4 of fiscal year 2022.
New customers and products startups generally cause margin dilution early in the lifecycle, which I recovered as the program matures.
We expect sequential quarterly increases in a stair stepped fiscal year 2023, and we are affirming our guidance for the full year with results expected at the high end of the range for sales and operating margin.
Today's operating environment remains challenging filled with uncertainty from geopolitical events pandemic global supply chain disruptions part shortages inflation and a looming economic downturn.
Addressing part shortages has become a constant priority as we look to better align production forecast with material availability and manufacturing capacity.
When it comes to microchips, it's important to note that not all of them are created equal so to speak and the higher grade chips needed in the applications. We support are still in short supply.
And as costs rise, we are leveraging productivity improvements and partnering with our customers to maintain competitiveness.
For the first quarter net sales were $406 million, a 39% increase compared to Q1 last year and 9% better than Q4.
Not only was this a record high for our company. It was the first time, we eclipsed the 400 million dollar mark threshold in a quarter.
All three vertical end markets, we serve reported large increases with automotive posting a record high of $185 million.
This represents a 43% increase compared to Q1 last year and 46% of total company sales in the quarter.
It is also a 21% sequential step up from Q4.
We continue to we continue to see growth opportunities in this vertical market, particularly as applications such as advanced driver assistance systems are more widely adopted our support will enable further advances in areas such as battery management electronic steering electronic braking motor controls and redone.
Safety systems.
With over 37 years of experience producing high quality electronic assemblies that meet stringent regulatory requirements of the automotive industry.
We are ideally positioned to assist at the electric electrification of vehicles evolves.
Net sales in medical where a $115 million, a 35% increase compared to Q1 last year and 28% of total company sales.
This is the second consecutive quarter for this business to post gains in excess of 30% versus the same period in the prior year.
Our medical customers also have stringent standards for their products. So our capabilities are uniquely tailored to meet the requirements and challenges of the medical market.
Since 1999, we have manufactured millions of medical electronics drug delivery systems and single use medical devices.
Our launch of Kimball medical solutions highlights our full service of capabilities, so that when customers considered a whole package of value, it's clear our offering extends beyond electronics.
Net sales in our industrial vertical totaled $101 million, a 35% increase over the recast it first quarter of last year and 25% of total company sales.
As a reminder, public safety is now included in our industrial vertical results.
In this dynamic and evolving market, we collaborate with our customers on products. That's similar that support smart cities energy efficiency and energy management as well as industrial devices and applications focused on public safety.
Recent advances in electronics and mobile technology combined with lifestyle changes coming out of the pandemic are producing growth opportunities for our unique manufacturing capabilities.
So in summary, a very good quarter with record setting sales and momentum that will continue throughout fiscal year 2023.
I'll now turn the call over to Jana to provide more detail on the financial results for Q1, and our guidance for the full year.
Jennifer.
Thanks, Don and good morning, everyone.
As Don highlighted total net sales in the first quarter were $406 million or.
39% increase over Q1 last year and an all time record high for our company.
Foreign exchange adversely impacted sales by 5% in the quarter. So at historical rates the growth would have been even more impressive.
The gross margin rate in Q1 was seven 2%, a 190 basis point improvement compared to the first quarter of fiscal 2022 with our record sales driving a higher level of absorption this year versus a year ago. When production was more significantly curtailed by part shortage.
Yes.
Adjusted selling and administrative expenses in the quarter were $16 million compared to $12 $3 million in Q1 last year.
The increase resulted from higher salary and related payroll cost.
Stock based compensation.
Factoring fees associated with our accounts receivables and travel expense.
When measured as a percentage of net sales however, adjusted selling and administrative expenses were three 9% a 30 basis point improvement compared to Q1 last year.
Adjusted operating income for the first quarter was $13 $3 million or three 3% of net sales, which compares to last year's Q1 adjusted results of $3 $3 million or one 1% of net sales.
While adjusted operating income was outside of our guidance range. It did meet our expectations for stair stepped fiscal year as we ramp up new production and grow into our clothes, so to speak with new expansions in Thailand and in Mexico.
We fully expect a lot of margin to improve over the remainder of the year.
Other income and expense increased slightly with expense of $1 $4 million in the first quarter of this year versus expense of $1 $2 million in Q1 of fiscal 2022.
The effective tax rate in Q1 was 21, 9% compared to 27.4 in the first quarter last year.
Net income in the first quarter of fiscal 2023 was $9 $5 million or <unk> 38 cents per diluted share compared to adjusted net income in Q1 of last year of $1 $5 million or six cents per diluted share.
Now turning to the balance sheet.
Cash and cash equivalents at September 30th 2022 were $19 $7 million.
Cash flow used by operating activities in the quarter was $62 million in cash conversion days were 99 days.
Up from 75 to 73 days in the first quarter of last year.
Our cash flow N C. C. D results were driven by increase in inventory, which was $187 $4 million from a year ago.
$53 $9 million from last quarter.
We continue to purchase material is not impacted by the part shortages. So that we can fulfill customer orders once the components in short supply are received.
It is also important to highlight however that the increase in inventory is heavily concentrated in Mexico, and Thailand, the facilities, where recent expansion have doubled our footprint and manufacturing capacity.
We expect inventory turns measure it as production days sales on hand to normalize at the part shortage abates and our expansions continue to ramp.
But the absolute dollar level of inventories will likely be higher than levels in the past to support stepped up production volume.
Capital expenditures in the first quarter were $19 million largely in support of our facility expansion in Poland.
Equipment for the recently completed expansion in Mexico.
Capital deployed to support the healthy funnel of new product introductions and equipment with leading edge technologies and capabilities.
Borrowings on our credit facilities at September 30th 2022 were $232 $5 million compared to $72 $6 million a year ago.
And $186 million at the end of fiscal 2022.
Our short term liquidity available.
Presented as cash and cash equivalents plus the unused amount of our credit facilities totaled $113 $4 million at September 30th 2022.
There were no shares repurchased in the first quarter of fiscal 2023.
Since October 2015 under our board authorized share repurchase program, a total of $88 $8 million has been returned to our shareowners by purchasing five 8 million shares of common stock.
We have $11.2 million remaining on the repurchase program.
We do anticipate some share repurchase in the fiscal year.
You go to the stock based compensation in order to keep our share count flat.
As Don noted we are affirming our guidance for fiscal year 2023, and expect full year results to be at the high end of the range with net sales of one six to $1 $7 billion, a 19% to 26% increase year over year.
Operating margin of four six to five 2% and capital expenditures totaling $80 million to $100 million.
Just to reiterate a point made in John's opening remarks, new.
New customers and products startups can cause margin dilution early in the lifecycle.
As programs mature and volumes ramp cost efficiencies or games.
With the increased launch activity due to facility expansions over the last 12 months there has been near term pressure to profitability, but we fully expect this to be recovered.
As a result, our guidance anticipate sequential improvement in fiscal 'twenty, 'twenty, three which eat with each quarter expect it to improve over the previous one.
With that I'll now turn the call back over to Don.
Thanks Jana.
In closing, we're very proud of our accomplishments in Q1.
This includes not only the financial results, but also other achievements honors and distinctions in the quarter.
For example, we were awarded a civil a silver medal for corporate social responsibility and business sustainability from equal about is the world's largest and most trusted provider of business sustainability ratings.
Silver metal it places our company in the top 25% of the 90000 plus companies that equal bad as rates.
And demonstrates how we live our guiding principles through awareness and respect for sustainability.
<unk> ethics environment and human rights.
This achievement is a credit to our teams worldwide.
With an outlook for fiscal 2023 that includes record results in certain financial metrics, including top line growth, we're very bullish on the long term prospects for the company.
We're forecasting sequential quarterly increases for the balance of fiscal 2023 with emphasis on aligning production forecast with material availability and manufacturing capacity increase.
The increase in cash flow through inventory management, and driving additional and sustainable operating leverage at even higher levels of revenue in a quarter.
The $2 billion of annual revenue milestone is clearly in our sights and with plenty of recent experience expanding facilities or manufacturing capacity is being carefully evaluated at each location to support the higher level of production needed to reach this milestone.
Partnership with all members of the value chain is critical in this exercise is we believe our customers growth becomes outgrowth.
Finally, I'd like to take a moment to welcome Tom <unk> to our board of directors.
Tom was appointed a new director at our Board meeting in September and will stand for election to a full term at the annual meeting of Shareowners later this week.
It is an honor to have Tom join us with as well rounded financial expertise.
<unk> experienced with major multinational organization.
Organisations and demonstrated leadership and a variety of global businesses, driving both organic growth and strategic acquisitions.
He further enhances our board distinct and valuable skill sets as we continue to build lasting relationships and global success with our stakeholders.
We expect to learn a lot from Tom So that we become an even better company, while creating quality for life.
I would now like to open the lines for questions.
Thank you so ladies and gentlemen analysts may ask a question at this time question Pete questions. So one on your dollar pad you may remove yourself from the Cuba person starts you'll you'll tell but we are.
But if youre using a speakerphone you pick up you had said before asking your question well woman peaceful the first question.
First question comes from Mike <unk>, Mike Who's from Lake Street Cup Smokers Pease go ahead next.
Hey, guys good morning, and congrats on the quarter.
Yeah.
So just my.
Just my first question here I wanted to touch on the margins.
So you guys were down to a gross margin sub four 2% in the quarter.
And you guys didn't know that you guys see a sequential improvement throughout the year. So is this gross margin is this a snap back to levels like we saw in Q4 at around nine 2% or is this a gradual improvement I'm just trying to get a good sense of how we get to the higher end of guidance for.
Operating margin.
Yeah, I wouldn't we wouldn't describe it as a snapback, but a gradual improvement with each quarter.
Throughout the fiscal year in a stair step fashion, improving over the previous quarter and getting back to those levels Max that that we were at before in that in that 9% range. So that's that's how we think about it as as we go through the rest of the fiscal year.
Okay, and then are you going to see any ticked down in opex at all throughout the year.
Say that again I'm sure I'll make sure I understand your question.
So yeah, yeah, I'm, just basically I'm trying to get an idea of how we get to the higher end of that operating margin range and if we're not seeing it snapped back in gross margin I guess I'm trying to figure out are we seeing a tick down in operating expenses.
No I think you know with our with the the new footprint, especially the expansions in Mexico and Thailand.
Ramping up those new production capabilities and capacities that were put in place and those expansions as well as other new programs.
That's improving that absorption rate improving the utilization driving the improvements in those new program introductions.
That's really where the bulk of that margin improvement will come from.
And Max you're going to also see so it's twofold. It's the dynamic of improving revenue that also stair steps, while the margin stair step.
And so.
As you get to the back half of the year and the revenue was higher it also has higher margin and so taking the cumulative effect of that over the year. It is how you get there.
Does that help okay. Thank you.
And you're not going to see like a mix change where youre going to have higher revenue.
Higher margin revenue at the end of the year are you are you have any expectations in changes in mix.
That won't be that won't be significant not not nearly as the improvement in absorption as Janice said as we ramp up revenue into a footprint that's essentially already there.
Okay. Thanks, guys and then I, just kind of what I wanted to shift to our supply chain.
So is there any way you guys can quantify for how many how much revenue you guys did not ship in the September quarter.
Well, we we're still constrained in the September quarter.
I think if if you think about our updated full year guidance being towards the upper end of the range think about stair steps stair step throughout the fiscal year.
Yeah, they were talking about pretty big numbers that we're still we're still missing somewhere if I had to ballpark it maybe as much as 10%.
If we had all okay that we needed you know so so that's a ballpark number Max but it's significant deals that I guess the point I want to make is the constraint is still significant and so as we anticipate availability of components improving throughout the fiscal year.
And you start to put those stair steps in place you know you can you can see where Q4 is going to be running at you know the rough range, where Q4 is going to be running for us to finish the full year near the upper end of the range of our guidance.
Thank you and then just a last one and then I'll jump back in the queue.
Where does backlog currently stand I know you guys with greater than 1 billion last quarter and then if you could touch on the mix of that or is it pretty similar to the mix in revenue this quarter.
But the mix is pretty similar at it fluctuates from customer to customer more so than it does from vertical to vertical.
You know the dynamic there Max that's important to note is as lead times improve.
Backlog.
Backlog softens or decreases you know sort of commensurate fashion. It takes time it doesn't happen immediately but you know we are seeing lead times improve in several areas and so we're still we're still monitoring that very closely.
But so order open order backlog was down a bit from the prior period, but still at very very high levels for us and again, it's it's stuff. We should have already shipped it's got a lead time dynamic to it and of course, our new new program wins.
Okay. Thanks, guys. That's it for me a great quarter.
Thank you take care have a good day.
The next question comes from Sheldon Stone from <unk>. Please go ahead.
Alright, good luck.
Yeah.
Alright can you hear me.
Yes.
Alright.
Thank you for taking my questions.
My first question is have you seen any changes to the same store growth.
Given the uncertain economic environment.
You know certainly it's added to additional rigor to the monthly sales and operations planning process as they look at their forecast going out further onto the horizon, they're factoring in certainly what would be an anticipated economic downturn.
But it certainly has not shown up in their forecasted demand to us demand remains very strong.
You know if you start with the automotive vertical inventories are still very low.
Especially in the U S, but around the world and so there's there's a backlog component there that's adding a lot of stability and I would say firmness to the demand. It's it's it's not it's not backed off at all so so very strong demand there.
We're still recovering in the medical vertical from from the pandemic in areas of that business that were impacted negatively by the pandemic. So that's that's also an added factor too.
Let's say bullishness to the outlook and frankly, our our industrial vertical with with the customers. We serve in that space. They also are working to replenish inventory levels as they have been constrained by component availability in their end markets, especially in climate control. So so theres there.
For us in the three the three verticals three end market verticals that we support we would say the sentiment has not changed and backlog remains very strong and and demand remains very strong.
Alright, Thank you, so which end markets do you see most potential growth within.
You know just like this quarter proved out you know in terms of the growth by each end market vertical you know it you really cant pick out one obviously automotive being the strongest but you know very strong double digit growth in both medical and industrial so we see a very similar picture going forward.
And in all three verticals remains very strong certainly our automotive vertical.
You may have recalled in past earnings.
Leases and webcast, we talked about winning a large electronic braking program.
Next generation electronic braking program.
That program has since launched and certainly factored into the automotive growth that we saw in Q1.
But really we've seen strong demand in all three end market verticals and again, we would expect it going forward.
Alright, thank you.
Certainly, we're all going about that and maybe slightly different ways, but I do think the industry. Overall is still in recovery mode from from part shortages pandemic caused part shortages.
And those that do I think we will we will fare better than those that don't.
Lifecycle.
As that comes online it will continue to to free up other capacity to address maybe the lagging technologies, but.
How should we think about seasonality from one quarter to another on the top line and then the revenue growth driven by capacity ramp up like should we expect that the capacity ramp up will also shadow like historical seasonal pattern.
Things, we should have already shipped it we had parts.
And that's you know that's really the significance of this of this of the story in terms of the second part of your question.
For us we feel like the return to our targeted operating margin levels will come from better absorption in our newly added capacity, that's where we're focusing our time and our energy.
That's not new to us I think we're good at that.
But it is challenging in the sense of the sheer size or magnitude of the growth that we're facing into.
And so that's what we're that's what we're focused on getting those programs up to their to their quoted run rates and and getting the bugs worked out of those those new production lines that are going into place that that's where we're spending our time and our energy.
I see and then given to a stop.
Adoption of the new facility and the new early production its lifecycle and then.
Hum.
A quick would you be able to share like how long the cost absorption process may take place or in other words, when like how many quarters would it need be.
Before reaching out the 9% gross margin range again.
Yeah, you know, we're expecting to have improvement each quarter on a sequential basis. So Q2 will be better than Q1, Q3, better than Q2, and Q4 better than Q3, and certainly by week by the time, we exit the fiscal year, we expect to be again.
Well within our normal operating margin and gross margin range and again the full year for operating income margin would be towards the upper end of our guidance for the full year.
Total.
So you get two or three quarters handy that I see.
Gradual step up each quarter.
It's fast by the way.
Yeah Yeah.
Yeah. That's all thank you so much dawn Jenna and thanks, Andy Baker of Handy Yep. Thank you.
As a reminder to us any further questions. Please press star Pogo.
No telephone keep not so the stocks only one.
Yeah.
It appears we have no questions at this moment.
Back to John for any final remarks.
Thank you Darius that brings us to the end of today's call.
We appreciate your interest and look forward to speaking with you in the near future near future. Thank you.
Okay.
At this time listeners may shouldn't be hung up to disconnect from the call. Thank you and have a nice day.
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