Kimball Electronics Inc. Q3 2023 Earnings Call
Good morning, ladies and gentlemen, and welcome to the Kimball Electronics third quarter fiscal 2023 earnings Conference call My name Daisy and I'll be your call today.
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 that will be a question and answer period.
Ask a question simply press star and the number one on your telephone keypad.
Today's call May five 2023 is being recorded and 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 your hoist and the Red Rock Vice President of Investor Relations to begin the Mr. Rupp. Please go ahead.
Thank you and good morning, everyone welcome to our third quarter Conference call with me here today is Rick Phillips, our Chief Executive Officer.
Janet Croom Chief Financial Officer.
We issued a press release yesterday afternoon with our results for the third quarter of fiscal 2023.
To accompany todays call a 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 risks and uncertainties and are subject to our safe Harbor provisions as stated in our press release SEC filings.
And that actual results can differ materially from the forward looking statements.
All commentary today is focused on adjusted non-GAAP results.
Conciliations of GAAP to non-GAAP amounts are available in our press release.
This morning, Rick will start the call with a few opening comments.
<unk> will review the financial results for the quarter and guidance for fiscal 2023, and Rick will complete our prepared remarks before taking your questions I'll now turn the call over to Greg.
Thanks, Andy and good morning, everyone.
I am very pleased with my first quarter as CEO of Kimball electronics and with the opportunity to share strong results for Q3.
The last 90 days has been filled with team meetings customer introductions facility visits and investor activities.
Can assure you after a fast paced onboarding that I'm, even more excited about the future for our company we've been on a path of unprecedented growth and for the fifth consecutive quarter revenue reached an all time record high.
Throughout this journey operating margin has improved as we ramp up new and existing programs and leverage our facility expansions in Thailand, and Mexico we.
We are forecasting a solid finish in the fourth quarter and are updating our outlook for the fiscal year with sales expected at the high end and adjusted operating margin in the mid to low end of our guidance range.
Net sales in Q3 were $485 million.
32% increase compared to the same period last year, and 11% better than our previous best quarter, which was in Q2.
While conditions in the global supply chain continued to improve the recovery remains gradual with only modest increases in the availability of the component parts that are in short supply and needed for the products we produce.
We estimate topline growth was constrained approximately 5% in Q3 by part shortages.
Similar to the first two quarters of the fiscal year, all three vertical markets reported robust double digit increases in this quarter all of them set record highs.
Net sales in the automotive vertical our largest business were $216 million.
This represents a 34% increase compared to Q3 last year and 45% of total company sales.
It is also an 8% sequential step up from Q2.
During the quarter. We have also been updating our strategic plan, which includes a review of our positioning and the growth opportunities within each of the vertical markets we support.
The industry Megatrends in the automotive vertical identified during this review continued to present, a meaningful tailwind for the company, even yet consumer demand softens during a global economic slowdown.
Electronic content that Leverages advanced technologies and expanded operating systems is being added to cars and trucks at an increasing rate and could generate growth for our company at four times, the Oems vehicle production rate over the planning period.
Approximately 70% of our automotive business is an electronic power steering.
And the balance is in other applications such as innovative next generation braking system in Reynosa, Mexico for example.
Within steering features such as autonomous driving lane departure and self parking are increasing in popularity.
And the technology to support them resides in an <unk> or electronic control unit in the steering column the.
The architecture to turn the wheels for electric motors internal combustion engines or a hybrid of the two is roughly the same meaning the applications. We support are agnostic to the type of vehicles produced.
Because the physical size of the Acu is fixed adding functionality to it increases the complexity of the manufacturing process and it increases the value to our customers.
In addition, the automotive industry is highly regulated with stringent certifications validation protocols and change management systems. So this business is sticky and often results in program life cycles that can span eight to 10 years in length with single source awards the.
The combination of these insights give us confidence that our positioning within automotive will continue to generate meaningful growth for the company.
Turning now to the medical vertical market net sales in the third quarter were $134 million, a 30% increase compared to Q3 last year and 28% of total company sales. This was a record result, and the fourth consecutive quarter with growth of 30% or more.
Third to the same period in the prior year. It was also a 7% step up versus Q2.
Similar to automotive or strategic plan identified meaningful growth opportunities for medical fueled by industry megatrends, including an aging population, increasing access and affordability to health care decreasing medical device sizes with added electronic content.
Ah connected drug delivery systems, and an overall trend by Oems to outsource higher level assemblies.
We are strategically positioned to support this growth in areas such as respiratory care surgical systems patient monitoring equipment in vitro diagnostics drug delivery and imaging systems, all with a focus on class II and class III devices and higher level Assembly production.
Net sales in the industrial vertical market totaled $127 million, a 29% increase over the third quarter last year.
And 26% of total company sales this was a record topping our previous quarterly high by 21%.
Industrial, which we refer to as green and clean supports products that promote energy efficiency safety carbon neutrality, and a better consumption of natural resources, including water gas and electricity.
We are well positioned within the value chain for most major brands of residential and commercial heating and cooling systems smart metering, particularly in Europe factory automation and a new emerging market for EV charging stations ones that dramatically reduce the length of time required to recharge electric vehicles through a super.
<unk> process.
We see the Mega trend in legislation and incentives supporting decarbonization as meaningful growth drivers and we are strategically positioned to support products that reduce environmental impacts.
So in summary.
A very good quarter with record setting sales in all three vertical markets and good momentum as we look to close out fiscal 2023.
I'll now turn the call over to Janet to review, the Q3 financials in more detail and outline the outlook for the fiscal year Janet.
Thanks, Rick and good morning, everyone.
As Rick highlighted net sales in the third quarter were $484 $7 million or 32% increase over Q3 last year.
Foreign exchange negatively impacted sales by 2% in the quarter.
So our historical rate. This record result would have been even stronger.
The gross margin rate in Q3 with eight 9%.
30 basis point decline compared to the third quarter of fiscal 2022 with.
With the decrease primarily driven by under absorption at our facilities that have recently been expanded and softness in the semi cap and handset space.
Adjusted selling and administrative expenses in the third quarter were $17 $4 million.
Compared to $14 $4 million in Q3 last year with the increase resulting from added resources to support our topline growth wage inflation and accounts receivable factoring.
When measured as a percentage of sales however, adjusted selling and administrative expenses were three 6% a 30 basis point improvement compared to Q3 last year.
Adjusted operating income for the third quarter was $25 6 million or five 3% of net sales, which compares to last year's adjusted results at $19 $6 million or five 3% of net sales.
Oh why margin rate year over year.
On a sequential basis. However, Q3 represents a 120 basis point step up versus second quarter, as we continue to make strides and operational efficiencies.
Newly expanded facility.
Other income and expense was expense of $3 $3 million in the third quarter versus expense of $2 1 million in Q3 of fiscal 2022.
With the change, resulting from higher interest expense this year and outcome from elevated debt levels and the current interest rate environment.
The effective tax rate was 25% in the third quarter, which equaled last year's rate.
Net income in the third quarter of fiscal 2023 was $16 4 million or <unk> 65 per diluted share compared to net income in Q3 last year of $13 6 million or 54 cents per diluted share representing a.
20% plus increase year over year.
Now turning to the balance sheet.
Cash and cash equivalents at March 31, 2023 were $34 million.
Cash flow generated by active by operating activities was $14 million or first quarter of positive cash flow in some time.
Cash conversion days were 92 days compared to 79 days in the third quarter of last year and 97 days in Q2.
Please note that we started to include customer advances in our CCD calculation.
This modification is consistent with our peers and industry norm.
Periods have been recast or they change.
We're starting to we're starting to see relief in working capital needed to compensate for part shortages.
Our cash flow and CCD results continue to be adversely impacted although there was sequential improvement in days versus last quarter.
Inventory increases had been a significant driver and ended the quarter at $488 $2 million.
$149 $8 million from a year ago, but roughly flat compared to last quarter.
As anticipated inventory is leveling off in terms of absolute dollars and the improvement in CCD is an indication that supply chain challenges are easing.
Capital expenditures in the third quarter were $24 $7 million largely in support of completing the facility expansion in Poland, adding equipment in Mexico and capital needed for new product introductions across our entire footprint.
Borrowings on our credit facility at March 31 were $289 $4 million compared to $137 1 million at March 31 2022.
And $273 million at the end of Q2.
Our short term liquidity available represented as cash and cash equivalents plus the unused amount of our credit facility totaled $128 5 million at March 31 2023.
There were no shares repurchased in the third 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 our common stock.
We have $11 $2 million remaining on the repurchase program.
As Rick noted we are updating our outlook for fiscal 2023 with net sales expected at the high end of our guidance range of one seven to $1 $8 billion, which would represent a 30% increase year over year.
Adjusted operating income is expected to be at the mid to low point of our guidance range of four six to five 2% of net sales.
And capital expenditures are expected to be in the range of $80 million to $100 million.
The impact to operating income margin is driven by a decrease.
Primarily due to under absorption at our facilities that have been recently expanded and softness in the semi cap and handset space.
Similar to other companies, we are seeing a temporary slowdown in that space driven by the macroeconomic environment.
Finally, as we look forward to our next earnings release, We'll report Q4 results in mid August which is a couple of weeks later than our normal practice.
This change will reduce the gap between our earnings release and the filing of the 10-K, while keeping the overall reporting timeline consistent with industry averages.
As per normal we will issue a press release with the details approximately two weeks in advance of the event.
So with that I'll now turn the call back over to Rick.
Thanks Janet.
I hope you can sense that we are very pleased with the financial results for Q3 and the outlook for the fiscal year. We're also encouraged by the learnings from our strategic plan.
With a heavy focus on growth within EMS the road to $2 billion in annual revenue is within our sights.
Our work validated that we are strategically positioned to reach that milestone with new program wins and increased capacity, resulting from the recent facility expansion.
We expect to celebrate the completion of the expansion in Posen, Poland.
With a ribbon cutting ceremony over the summer and we will begin to ramp up additional production in this space in fiscal 2024.
We are also proud of the many other achievements in the quarter, including the publishing of our ESG report for calendar year 2022.
This report titled poised to make an impact can be found on our corporate website and highlights how our company remains committed to creating quality of life for our customers our employees the communities, where we operate and our shareowners.
Morningstar sustain Olympics, a leading ESG research ratings and data firm rated us number one among electronics manufacturers for ESG risk.
I would like to thank our team for the excellent work on this disclosure and the overall report.
Support that I have received from the great people at Kimball electronics, while transitioning into my new role.
I look forward to working together with our team to provide excellent service and growth for our customers to enhance our outstanding company culture to serve our communities and to create short and long term value for the company and our shareholders.
Dazing I would now like to open the lines for questions.
Thank you.
Ladies and gentlemen, unless you may ask a question at this time by simply pressing star followed by one on your DAU part you may remove yourself from the queue by pressing star to an adult pad.
We ask that if you are using a speakerphone you pick up your handset before asking a question. So that star followed by one on your keypad.
One moment please for the first question.
Our first question today is from Jason Smith from Lake Street Capital. Jason. Please go ahead. Your line is open.
Hey, guys. Thanks for taking my questions and congrats on some really solid results.
Just wanted to start with sort of your backlog I know thats remained pretty robust over the past year here, but are you seeing any issues with the commensurate cancellations within that number.
Hey, Jason Good morning, its Jana.
And so our backlog remains fairly robust and we have not seen material decommit or cancellations and remember you know went up the supply chain shortage started.
We were seeing 52 week lead time.
For parts coming through and that was in CNR rights are noncancelable nonreturnable.
So it's unlikely that you see a material decommit.
And our forecast them.
Going forward, we continue to monitor that though for the future state of Ntis and so far so good.
Okay. No. That's that's great to hear and just kind of sticking with backlog is the mix with in backlog pretty similar to the current revenue mix.
In terms of the verticals automotive medical industrial.
Yeah.
Yes, it's fairly consistent.
Okay.
And then looking at the medical space, obviously that space was impacted by his for elective surgeries labor shortages et cetera, but do you think you're back to a more normalized environment within that business.
I still think there's more opportunity and medical.
The last data point I saw there were like a million surgical procedures that it's still been yet to performed a pent up demand from the pandemic.
But that has been consistent for a while and so we keep thinking what are people going back.
You know a knee replacement hip replacements et cetera done and so I'm not sure when that is ultimately going to kind of push through but the data demonstrates that the demand is certainly there.
Okay understood and then just the last one from me and I'll jump back in the queue you highlighted EV charging stations within that industrial segment.
Just curious how you think how big of an opportunity you think that can be.
Here in the near term and I guess longer term as well.
Thanks, Jason This is Rick.
We're quite bullish on that.
We've been in a number of discussions with customers.
Talking about some pretty large potential opportunities it's fairly early stage on some of those conversations as it relates to the Supercharging stations, but we think we're well positioned for those.
We anticipate that that will be a good driver for us in industrial.
And that's important right, Jason it's in industrial it's not an automotive.
Okay got it.
Appreciate the color guys. Thanks, a lot.
Thanks, Jason.
Thank you our next.
Next question today comes from Anja Soderstrom from Sidoti <unk>. Please go ahead. Your line is open.
Okay.
Good morning. This is Stefan <unk> on for on your sort of strong.
Good morning.
Our first question is on work Protoconid Cobb Theatre.
And how much it contributes to revenue and when do you see a comeback.
So we don't disclose how much it contributes to medical what I can tell you is it's wrapped in our industrial vertical.
Hi, it is with and the automated test and measurement.
<unk> of our industrial vertical.
And the softness that we're seeing is it.
And keeping with what you know so many other companies are fed in terms of softness and.
The consumer commercial handset space.
We expect it to come back.
And a.
<unk> period of time, but I think the softness is just related to the soft landing of the global recession, and so we're continuing to monitor it very carefully.
Similar to other companies.
Thank you Howard.
Business doing.
So we tend not to talk specifically about certain pieces of our business.
You know, we don't give specifics, but I you know that.
The business is doing well, but we are seeing softening.
Yes, I guess the last one for me is how much of the auto demand is catching up in <unk> versus <unk>.
Well, we had a fairly large program come online in reynosa relative to next generation braking. We've also had.
Some fairly significant business related to peering.
And that next generation technology so.
If what you're asking is if we expect that the demand related to the automotive is going to roll over as we see a push through of the backlog I don't anticipate that the demand in automotive is still very strong.
And then just if on the other element of that.
Completely agree with with Janus comments. The other element is that we are seeing increased electronic content going into the car. So.
That's a nice tailwind for us because it's not directly and completely driven by the number of units, we're seeing increases on our side, because there's more content going into each unit.
Thank you so much asking my question trying to get a correlation between us and the OEM in terms of volume its going to be hard to do because.
It is absolutely not a one to one.
Okay.
Thank you your protocol with Hudson broken material. Thank you.
Thank you.
Thank you. Our next question today is from Hendi <unk> from Gabelli funds.
Please go ahead your line is open.
Good morning, Rick John and Andy and then a nice smoothing it off where the 400 gig.
Nice to meet you as well Andy.
My first question is about the facility expansion.
Kimball electronics spend is expanding facilities in Mexico, Thailand and pollen.
Following the completion.
How long it.
How long they take before.
Ramping up towards high yield Tuesday showed great. That's my first question and then my follow up is can you remind us for each of.
Those facilities what segments they will address.
Yes.
Yeah, that's a great question, so and I'll give you some additional color.
<unk> came online in January of 2022, so it's been up for almost 18 months.
Mexico came online in the summer of 2022, so it's not yet anniversaried a year.
And Poland, we will cut the ribbon on the summer.
All of our facilities produce all three of our verticals and so we don't have a single facility that is a.
Our unique vertical.
In terms of competition.
We expect the ramp up in terms of absorption.
Take roughly 12 to 15 months for a facility depending on.
A variety of of timing aspects related to new product introductions, but generally.
No.
Four to five quarters, and we would expect it to be.
At a rate and Oi margin in keeping with the rest of the portfolio.
If that helps.
So.
Yeah. So I think that also implies that okay, well youre ramping there is some gross margin pressure and then once you.
Hi, rich.
Our utilization great Martin will be.
Well, we'll see no more margin pressure from the ramp up.
His direct in Mexico, you know now.
Now being the flagship of Kimball.
With the most significant footprint in terms of total capacity and we provide that information.
And then in the K and so it's just getting that facility.
Where it needs to be in terms of operational efficiency and utilization, but again, we're not even four quarters and to Mexico and so we anticipated it would take some time history tells us that it would take some time, but we are pleased with the progress and where we know that the facility.
It's going to be once a day name birthday anniversaries that year.
Okay.
And then and then.
I also wanted to ask about pricing and negotiate suddenly in light of the cotton environment inflation.
What is the latest snapshot of.
Pricing in the pricing negotiation.
Yeah. So you know one of the things that were.
Looking at providing and to everyone is information on non manufactured revenue. So what I can tell you is in terms of pricing.
We are making great strides with our customers in terms of them.
Non standard material order freight costs et cetera, things, specifically related to supply chain and passing those costs on them, Although I know that you know.
There is no margin associated with that.
Relative to things like wage inflation inflation operational efficiencies. There is always the expectation from our customers that we find ways to be more efficient.
Keep that cost in line and so that really becomes a partnership between us and the customer to drive savings.
I see.
And then.
Vic mentioned that electronic content in cars and trucks can provide opportunity.
Four times as much as I believe the unit growth I don't know well.
I forgot.
Referring to exactly can.
Can you provide more colors in terms of the like for ex weather that refers to let's say like your main product like sitting wheels electronic brakes, and then hum.
What else.
Essentially like what else can capture that's like four times unit growth.
Sure So what we're seeing.
Given the.
Limited size thats possible for the electronic control unit that more electronics are being added to that so this would include.
Things like lane departure self parking capability, we have to build into that EC you additional electronic content and so.
Those items become.
More sophisticated.
More costly.
And add more value.
So where in the past some of those technologies would not have been included in the Acu.
Adding them and allows us to increase the value that we're creating.
And giving to our customers within that same acu.
Okay.
So I think let's say the electronic control units, let's say to steering wheels.
Increased confidence.
At the same time.
Let's say it like that.
The ASB, Okay, you will see like higher ASP.
Yes.
Content growth.
Does it include let's say like a.
Product expansion into Adjacencies, and then I think.
I'm wondering what the E brake as part of that is like four times estimate.
Yes that would also be included again, we're seeing.
Particularly in EV I would say, we're seeing the braking systems become absolutely more sophisticated in a similar way.
Okay, and then any potential yes.
Got it for battery storage.
One of the things is how do you take all of the inertia from braking.
And send that power back to the battery.
To prolong the life of the battery and the number of miles that you're able to go between charging.
And so it's a really really neat technology that were seen evolve, but again you have the limited space on the car and so you have to figure out in this limited space, how do we provide them.
The capability.
And it you know so increased technology increased engineering.
And higher quality.
Yes.
And if I did to the timeline, whether it may be early 'twenty to 'twenty four.
Or like.
Late 'twenty to 'twenty four.
Any E N.
And he decided to do to the timeline will be appreciated.
So weird.
We are experiencing that onset of technology now and.
And we expect it to come through and the automotive vertical.
<unk>.
Over the coming years for sure.
Okay Yeah.
Thank you Jana and Andy.
Thank you Andy.
Thank you as a reminder, before we take our next question. If you would like to Register a question. Please press star followed by one on your telephone keypad.
Our next question is from Mike Pfeffer from singular research Mark. Please go ahead. Your line is open.
Thank you. This is Mac first singular research.
Congratulations on the quarter.
And thank you for your hard work very much appreciate it.
Our operations team does an amazing job.
So I have two questions. Let me so question number one so with the federal reserve and ECB.
Continuing to increase interest rates, which I think is a leading indicator.
And regional banks and leasing that as states continue to fail, which I also think it's a leading indicator.
Oh, well in your opinion at Kimball positioned for a possible recession specifically.
What changes would you Institute in case of a recession.
You know, Matt that's a great question and we actually just completed our strategic planning process that we do every year and part of the strategic planning process includes scenario analyses over outcomes that you never expect but you have to be prepared for as part of Brexit.
Management and just good financial hygiene, what I can tell you is we feel really good about our forecast. However, having said that we have solid protections in place in terms of ample liquidity.
And you know.
Room on our balance sheet to make sure that we can service our customers and and.
Weather whatever storm may have having said that I actually think that you know.
We just got numbers that came out today the jobs number it's still very strong and so.
We arent anticipating some you know horrific.
[laughter] Doom and gloom downturn.
Grace are high right and so it was really great to see.
Positive free cash flow coming out of chemo and the indication of our our improvement.
Improvement in C. C D, which is kind of you know and prove our.
<unk> debt profile.
Can it continue to monitor it and certainly we have plans in place but.
We feel confident that.
Whatever may happen would be short lived and we would be able to to get through it just fine with our credit facility.
We haven't.
Thank you. Thank you.
Question number two.
So in quarters past you spoke about global supply chain disruptions you spoke about parts shortages.
And today, you kind of said the situation is easy.
Can you provide a little bit more color on that specifically.
Specifically, what parts are still in very short supply if any.
So we don't talk specific parts, but what I can tell you is last quarter, we said that right.
Roughly 10% of sales, we weren't able to produce because we were working through the part shortage. This quarter. It was only 5% and we had an improvement N. P. C D and our inventory levels did not increase it was roughly flat quarter over quarter and so you should take that as a strong.
All indications that you know as we indicated in Q2 and people have asked over the quarters and if you go back to the transcripts what you'll hear is the key.
Consistent message from me, which was we expected that by the end of fiscal 2023.
The part shortage and supply chain challenges would be largely behind us.
And we would see improvement in our cash conversion and inventory days.
As we were working through that backlog and this quarter bore that out.
And it really meaningful way.
And Matt maybe to add to that one of the things that's directly related to your question that we track very closely internally is just on a monthly basis, how does what's the difference between the orders that we received from a demand standpoint, and what we ship out and Thats, a very important metric for us and we've seen it over the last three or four months steadily.
Improve and as Janice said it would we're on a trajectory to get back to normal levels over the next few months. So we're really encouraged by that albeit it's still an issue it's still.
Our battle, our supply chain folks fight everyday to make sure that we have the parts that we need but it is certainly easing.
Great. Thank you very much again.
Relations on the quarter.
Thanks, Matt.
Thank you as a final reminder, if anyone would like to register a question. Please press star followed by one on your telephone keypad.
We have no further questions. So I'd like to hand back to the management team for any closing remarks.
Thanks, very much that concludes our call today are <unk>. If you don't mind, please close the call with replay instructions.
Of course, thank you thanks, everyone for joining today's call. If you missed any portion of the call I would like to listen to it again, a telephone replay will be made available. Shortly after the call has concluded on the IR page of the company's website. You may now disconnect your lines and have a lovely day.
Thank you. Thank you.
Okay.
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Thank you.
Okay.
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Okay.