Q2 2024 Kimball Electronics Inc Earnings Call
Operator: Good morning, ladies and gentlemen, welcome to the Kimball Electronics second quarter fiscal 2024 earnings conference call. My name is Drew and I'll be the facilitator for today's call. All lines have been placed in a listener only mode to prevent any background noise. After the completion of the prepared remarks from the Kimball Electronics leadership team, there will be a question and answer period. To ask a question, simply press star and the number one on your telephone keypad.
Good morning, ladies and gentlemen, welcome to the Kimball electronics second quarter fiscal of 'twenty 'twenty Four earnings Conference call. My name is Jay and I'll be the facilitator for today's call. All lines have been placed in a listen only night to prevent any background noise.
After the completion of the prepared remarks from the Kimball electronics leadership team that we will be a question and answer period to ask a question simply press star and the number one on your telephone keypad todays call February six 2024 is being recorded a replay of the call will be available on the Investor Relations page of the Kimball electronics website.
Operator: Today's call, February 6th, 2024, is being recorded. A replay of the call will be available on the investor relations page of the Kimball Electronics website. At this time, I would like to turn the call over to Andy Regrut, Vice President, Investor Relations. Mr. Regrut, you may begin.
At this time I would like to turn the call over to Andy regret Vice President Investor Relations. Mr. Got you may begin.
Andrew D. Regrut: Thank you, Operator, and good morning, everyone. Welcome to our second quarter conference call. With me here today is Rick Phillips, our Chief Executive Officer, and Jana Kroon, Chief Financial Officer. We issued a press release yesterday afternoon with our results for the second quarter of fiscal 2024.
Thank you operator, and good morning, everyone welcome to our second quarter Conference call.
With me here today is Rick Phillips, our Chief Executive Officer, and Jana Croom, Chief Financial Officer.
We issued a press release yesterday afternoon with our results for the second quarter of fiscal 2024.
Andrew D. Regrut: To accompany today's 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 risk and uncertainty, and are subject to our safe harbor provisions as stated in our press release and SEC filing, and that actual results can differ materially from the forward-looking statement. Reconciliations of Gap to Non-Gap Amounts are available in our press.
To accompany todays call a presentation has been posted to the Investor Relations page on our company website.
Before we get started I would 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 and SEC filings and that actual results can differ materially from the forward looking statements reconciliations of GAAP to non-GAAP amounts are available in our press release.
Andrew D. Regrut: One other housekeeping item to mention, starting this quarter we have added a page of other financial metrics to the press release, which includes depreciation and amortization, stock base compensation, cash conversion days, and open orders for the relevant period. These additional disclosures are in line with our commitment to providing you with enhanced transparency into our business operations and key performance metrics. This morning, Rick will start the call with a few opening comments.
One other housekeeping item dimensions, starting this quarter, we have added a page of other financial metrics to the press release, which includes depreciation and amortization stock based compensation.
Cash conversion days and open orders for the relevant periods. These additional disclosures are in line with our commitment to providing you with enhanced transparency into our business operations and key performance metrics. This morning, Rick will start the call with a few opening comments Jen will review the financial results for the quarter and updated guidance.
Rick Phillips: Jana will review the financial results for the quarter and updated guidance for fiscal 2024. And Rick will complete our prepared remarks before taking your questions. I'll now turn the call over to Rick.
For fiscal 2024, and Rick will complete our prepared remarks before taking your questions I'll now turn the call over to Rick.
Rick Phillips: Thanks, Hendi, and good morning, everyone. As we expected, the second quarter of fiscal 2024 was hard fought, with our team navigating a challenging operating environment. Global macro headwinds, including pressure from elevated levels of inflation, higher interest rates, and geopolitical uncertainties have persisted, and the consumer is pulling back. The markets we serve are experiencing demand softening and our customers are changing production schedules and delivery date requirements. Sales in Q2 declined compared to the same period last year, with manufacturing output in the quarter being reduced to meet the lower demand as our customers worked through elevated inventory levels.
Thanks, Andy and good morning, everyone.
As we expected the second quarter of fiscal 2024 was hard fought with our team in navigating a challenging operating environment.
Global macro headwinds, including pressure from elevated levels of inflation higher interest rates and geopolitical uncertainties have persisted and the consumer is pulling back the markets. We serve are experiencing demand softening and our customers are changing production schedules and delivery date requirements.
Sales in Q2 declined compared to the same period last year with manufacturing output in the quarter being reduced to meet the lower demand as our customers work through elevated inventory levels.
Rick Phillips: Margins, on the other hand, remain stable, thanks in part to proactive measures taken to align our cost structure with slowing sales. We expect industry-wide pressures for the remainder of fiscal 2024 and have updated our guidance for sales and operating income for the full year to align with these trends. Based on what we know today, it seems likely the macro environment will remain challenging for some time.
Margins on the other hand remained stable. Thanks in part to proactive measures taken to align our cost structure with slowing sales.
We expect industry wide pressures for the remainder of fiscal 2024 and have updated our guidance for sales and operating income for the full year to align with these trends.
Based on what we know today it seems likely the macro environment will remain challenging for some time. Despite this near term Choppiness, we did not change our guidance for capital expenditures in fiscal 2024, as we continue to invest in long term growth opportunities.
Rick Phillips: Despite this near-term choppy, did not change our guidance for capital expenditures in fiscal 2020, as we continue to invest in long-term growth opportunities. With a strong funnel of new business supported by favorable industry megatrends, we're deploying a balanced capital allocation strategy focused on driving organic growth, global expansion, and long-lasting customer relationships. Turning back to the results for the second quarter. Net sales totaled $421 million, a 4% decrease compared to the second quarter of last year.
With a strong funnel of new business supported by favorable industry Megatrends, we're deploying a balanced capital allocation strategy focused on driving organic growth global expansion and long lasting customer relationships.
Turning back to the results for the second quarter.
Net sales totaled $421 million, a 4% decrease compared to the second quarter of last year.
From a geographical perspective, the top line was strong in North America up low double digits with particularly good results in our industrial vertical market.
Offset by declines in Asia and Europe.
Rick Phillips: From a geographical perspective, the top line was strong in North America, up low double, particularly good results in our industrial vertical market offset by declines in Asia and Europe. The decline in Asia occurred in Thailand, which was heavily impacted by our major medical customer that is involved in an FDA recall, while Europe appears to be a region of the world where the general economic slowdown is more significant compared to other areas of the world. One vertical market, Industrial, posted year-over-year growth in the quarter.
The decline in Asia occurred in Thailand, which was heavily impacted by our major medical customer that is involved in an FDA recall.
While Europe appears to be a region of the world, where the general economic slowdown is more significant compared to other areas of the globe.
One vertical market industrial posted year over year growth in the quarter with net sales totaling $113 million, a 7% increase compared to Q2 last year and 27% of total company sales the.
The strength this quarter was concentrated in charging systems climate control and public safety products.
We frequently refer to our industrial business is green and clean and in some respects, we're one best customer with.
Rick Phillips: Net sales totaling $113 million, a 7% increase compared to Q2 last year, and 27% of total company sales. The strength this quarter was concentrated in charging systems, climate control, and public safety products. Frequently refer to our industrial business as green and clean, and in some respects, we're our own best customer. Products that reduce environmental impacts, promote energy efficiency, safety, carbon neutrality, and the responsible use of natural resources.
With products that reduce environmental impacts promote energy efficiency safety carbon neutrality and responsible use of natural resources, we specialize in heating and cooling systems factory automation optical inspection electronic logging devices and charging stations.
Next is automotive, where Q2 sales totaled $200 million, a 2% decrease compared to the second quarter of fiscal 2023, and 47% of total company sales.
The decline this quarter was driven by weakening demand in Europe, partially offset by incremental strength in China.
Longer term, we continue to see a strong runway for growth in the automotive vertical.
Rick Phillips: We specialize in heating and cooling systems, factory automation, optical inspection, electronic locking devices, and charging devices. Next is automotive, where Q2 sales totaled $200 million. A 2% decrease compared to the second quarter of fiscal 2023, and 47% of total companies, The decline this quarter was driven by weakening demand in Europe, partially offset by incremental strength in China. Longer term, we continue to see a strong runway for growth in the automotive industry, driven by the industry trend toward incorporating more electronic content to vehicles, specifically in steering and braking systems, are proven expertise manufacturing safety-critical products that meet the stringent regulatory requirements of the industry, ideally positions us to support further advancements in the industry. As a reminder, most of our automotive business is currently in steering and braking, and it doesn't matter what's under the hood, whether it be an internal combustion engine, electric motor, or a hybrid of the two. Essentially, the architectures are the same for these vehicles, which is important as consumer preferences and adoption rates evolve and the industry transitions toward equality.
Driven by the industry trend toward incorporating more electronic content to vehicles, specifically in steering and braking systems.
Our proven expertise manufacturing safety critical products that meet the stringent regulatory requirements of the industry ideally positions us to support further advancements in these systems.
As a reminder, most of our automotive business is currently in steering and braking and it doesn't matter what's under the hood, whether it be an internal combustion engine electric motor or a hybrid of the two.
Essentially the architectures are the same for these vehicles, which is important as consumer preferences and adoption rates evolve in the industry transitions towards evs.
Finally medical with net sales of $108 million or.
A 14% decrease compared to Q2 last year and 26% of total company sales. This result was in line with our expectations.
As I alluded to earlier, our annual guidance reflects a $100 million reduction in sales with a major customer in this vertical partially offset by growth in other programs.
We expect these growth opportunities to continue to emerge as the population ages access and affordability to health care increases.
Medical devices get smaller in size and require higher levels of precision and accuracy.
And connected drug delivery systems become more common.
Our manufacturing capabilities extend beyond electronics and printed circuit board assemblies and include but are not limited to operations involving precision injected molded plastics complete device assembly for drug delivery systems, and sterilization and cold chain management.
Rick Phillips: Finally, Medical, with net sales of $108 million, a 14% decrease compared to Q2 last year, and 26% of total company sales. This result was in line with our expectations. As I alluded to earlier, our annual guidance reflects a $100 million reduction in sales with a major customer in this vertical, partially offset by growth in other programs. We expect these growth opportunities to continue to emerge as the population ages, access and affordability to healthcare increases, Medical devices get smaller in size and require higher levels of precision and accuracy, and Connected Drug Delivery Systems become more common. Our manufacturing capabilities extend beyond electronics and printed circuit board assemblies and include, but are not limited. Operations involving precision injected molded plastics. Elite Device Assembly for Drug Delivery Systems, and Sterilization and Cold Chain Management.
The business development team focuses on leveraging these capabilities with higher level assemblies or HLA.
Which is a category represent an opportunity for more value added content.
So in summary, a solid quarter in a difficult operating environment and an updated outlook for fiscal 2024.
I'll now turn the call over to Jana to provide more details on the financial results for Q2 and review our guidance for the full year Janet.
Thank you and good morning, everyone.
As Rick highlighted net sales in Q2 were $421 $2 million.
A 4% decrease compared to the second quarter of fiscal 2023.
Foreign exchange had a 1% favorable impact on consolidated sales.
Over here.
The gross margin rate in Q2 was eight 2%.
Jana Kroon: The business development team focuses on leveraging these capabilities with higher level assemblies, or HLA, which as a category represent an opportunity for more value-added content. So, in summary, a solid quarter in a difficult operating environment and an updated outlook for fiscal 2020. I'll now turn the call over to Jana to provide more details on the financial results for Q2 and review our guidance for the full year. Thank you, and good morning everyone.
40 basis point improvement compared to the same period last year with the increase being driven by a favorable product mix and lower material costs compared to 12 months ago.
We're dealing with global shortages impacting the electronics industry.
We are also aligning our cost to the current macro environment.
Adjusted selling and administrative expense in the second quarter were $17 $3 million compared to last year's adjusted Q2 results of $16 $4 million.
With the increase being driven by a 2 million dollar allowance for credit losses.
Although the customer associated with this charge is not in bankruptcy. We determined it was appropriate to consider the age of the outstanding amount, the creditworthiness and payment history their customer and the timing of expected payments.
Jana Kroon: As Rick highlighted, net sales in Q2 were $421.2 million, a 4% decrease compared to the second quarter of fiscal 2020, foreign exchange had a 1% favorable impact on consolidated sales year over year. The growth margin rate in Q2 was 8.2%. A 40 basis point improvement compared to the same period last year, with an increase being driven by a favorable product, and lower material costs compared to 12 months ago when we were dealing with global shortages impacting the electronics industry. We are also aligning our costs to the current maximum. Adjusted selling and administrative expense in the second quarter were $17.3 million compared to last year's adjusted Q2 results of $16.4 million, with the increase being driven by a $2 million allowance for credit. Although the customer associated with this charge is not in bankruptcy. We determined it was appropriate to consider the age of the outstanding amount.
As a percentage of sales.
Selling and administrative expenses were four 1% or 40 basis points higher than the second quarter of last year.
Adjusted operating income for the second quarter was $17 $1 million.
4% of net sales.
Which compares to last year's adjusted results at $17 8 million or four 1% of net sales.
Other income and expense was expense of $5 $3 million compared to expense of $3 $3 million last year.
The increase was the result of higher interest expense year over year, a product of our elevated debt levels and the current interest rate environment.
The effective tax rate was $26 five in the second quarter compared to 24, 5% in Q2 of fiscal 2020.
Adjusted net income in the second quarter of fiscal 2024 was $8 $3 million or 33 cents per diluted share compared to adjusted net income in Q2 of last year of $11 million.
Jana Kroon: The Creditworthiness and Payment History of the Customer, and The Timing of Expectations. As a percentage of sales, adjusted selling and administrative expenses were 4.1% or 40 basis points higher than the second quarter of last year. Adjusted operating income for the second quarter was $17.1 million, or 4% of net sales, which compares to last year's suggested results of 17.8 million, or 4.1. Other income and expense was expense of $5.3 million, compared to its expense of $3.3 million. The increase was the result of higher interest expense year over year, a product of our elevated debt levels and the current interest rate. The effective tax rate was 26.5% in the second quarter, compared to 24.5% in the first quarter, to a fiscal 20.
Or <unk> 44 per diluted share.
Turning now to the balance sheet.
Cash and cash equivalents at December 31, 2023 were $39 $9 million in cash flow used by operating activities in the quarter with $37 million.
Cash conversion days were 117 days compared to 97 days in the second quarter of fiscal 2023, and 103 days last quarter.
As a reminder, we have started including customer advances in our CCD calculation.
The results from fiscal 2023 reflect this change.
The increase in fees.
Quarter compared with Q2 in the prior year was driven by an increase in days sales outstanding and contact contract asset days and a reduction in accounts payable days.
In addition to our focus on inventory. We are also looking to significantly improve our cash conversion days as we more actively and aggressively manage into components.
Inventory ended the quarter at $455 $7 million.
Third to $487 $5 million at the end of Q2 and fiscal 2023.
$482 million last quarter.
We expect this number to continue to decline as we work with customers to rightsize inventory.
The current demand outlook.
Capital expenditures in the second quarter were $13 $2 million supporting organic growth maintenance requirements and investments in automation and efficiency.
Borrowings on our credit facility at December 31, 2023 were $321 $8 million compared to $273 $5 million, a year ago and $296 $7 million at the end of Q1.
Jana Kroon: Adjusted net income in the second quarter of fiscal 2024 was $8.3 million, or $0.33 per diluted share, compared to adjusted net income in Q2 of last year of $11 million, or $0.44 per, Turning now to The Balancing Act. Cash and Cash Equivalents at December 31, 2020, for $39.9 million, cash flow used by operating. This quarter was $30.7 million. Cash conversion days were 117 days, compared to 97 days in the second quarter of 2020. 103 days last year.
Our short term liquidity available represented as cash and cash equivalents.
Unused amount of our credit facilities totaled $105 $7 million at the end of the second quarter.
It is important to note that on January 5th 2024, we amended our short term credit facility to provide additional domestic liquidity for investments needed to meet working capital and other operating needs.
The amendment increased the borrowing limit to $100 million from $50 million and changes the maturity date to January three 2025 from February 2024.
There were no shares repurchased in the second quarter of fiscal 2024 since October 2015 under our board authorized share repurchase program, a total of $88 $8 million has been returned to our shareholders.
Jana Kroon: As a reminder, we have started including customer advances in our CCD calendar, and others. Thank you. Thank you, prior year was driven by, sales out, contact contract, and a reduction in accounts payable, in addition to a focus on. We are also.., to significantly improve our cash flow, as we more actively and aggressively, Inventory ended the quarter at $455.7 million, compared to $487.5 million at for a great day.
Purchasing five 8 million shares of our common stock.
We have $11 2 million.
Purchase program.
As Rick highlighted we are updating our guidance for fiscal year 2024, with net sales now expected to decline, 2% to 4% versus fiscal 2023, which compares to our previous guidance of flat with the prior year.
Operating income is estimated to be in the range of four 2% to four 6% of net sales compared to our previous estimate of flat with the prior year.
The guidance for capital expenditures did not change with a range of $70 million to $80 million.
I'll now turn the call back over to Greg.
Thanks Janet.
Before we open the lines for questions I'd like to recognize our team for once again being honored by circuits Assembly Service Excellence Awards.
Jana Kroon: Thank you. Thank you. We expect this number, Please see the complete disclaimer at http://sites.google.com to match, out. Capital expenditures in the second quarter were $13.2 million supporting organic growth, maintenance requirements, and Assessments and Automation.
In November we achieved the highest overall customer ratings in the categories of dependability and timely delivery technology value for the price.
Jana Kroon: Borrowings on our credit facility of December 31, 2023 were $321.8 million compared to $273.5 million a year ago. $296.7 million, are short-term liquidity available represented as cash and cash equivalent, plus the unused amount of our credit facility totals $105.7 million, at the end of the second. It is important to note that on January 5th, for we amended our short-term credit, to provide additional domestic fluidity for investors. Working Capital, and other options. The amendment increased the borrowing limit to $100 million from $50 million, changes the maturity date to January 3rd. Episode 5, from February 13-15. There were no shares repurchased in the second quarter of fiscal year 2016.
And manufacturing quality.
These awards are based solely on direct customer input.
I am very proud of our team's consistent focus on building long term relationships with our customers regardless of whether they are new or customers. We've worked with for a decade or more they consistently recognized the kimball team our culture and a common set of priorities that allowed us to continuously improve and keep our <unk>.
Promises.
I'd like to congratulate and thank.
Our team worldwide for receiving this recognition we are winning together Kimball way and I'm excited about what's ahead for our company.
Ladies and gentlemen.
Yeah.
Apologies, ladies and gentlemen, unless may ask a question at this time by simply pressing star one on your dial pad you may remove yourself from the queue by pressing star two when Youre dialed pad, we honestly if youre using a speakerphone you pick up your handset before asking your question one moment. Please for the first question.
Jana Kroon: Since October 2015, under our Board Authorized Share Repurchase Program, The total of $88.8 million has been returned to our shareholders, by purchasing 5.8 million shares. We have $11.2 million. As Rick highlighted, we are updating our guidance for fiscal year 2024 with net sales now at, Thank you. Thank you, which compares to our previous guidance of flat with Operating income is a, 4.2 to 4.6, compared to our previous estimate of flat. The guidance for capital expenditures did not change, www.
Our first question comes from Derek sorry to bug from Cantor Fitzgerald. Your line is now open. Please go ahead.
Yes, good morning, everyone. Thanks for taking the questions.
I wanted to just touch on the current environment.
Rick Phillips: HendiSusanto.com, On that, I'll turn the call back. Thanks, Janet. Before we open the lines for questions, I'd like to recognize our team for once again being honored by Circuit's Assembly Service Excellence Award. In November, we achieved the highest overall customer ratings in the categories of dependability and timely delivery. Technology, Value for the Price, and Manufacturing Quality.
By end market. It seems like industrial has pockets of strength medical sort of tracking as expected can you talk a bit about where the incremental weakness is coming from by end market, that's sort of leading to that.
The revision in the outlook I would imagine you're feeling some of the impact of the UAE strike.
Is the incremental weakness you expect for this year largely in automotive or really is it broad based.
Rick Phillips: These awards are based solely on direct customer, I am very proud of our team's consistent focus on building long-term relationships with our customers, regardless of whether they are new or customers we've worked with for a decade or more. They consistently recognize the Kimball team, our culture and a common set of priorities that allowed us to continuously improve and keep our promises. I'd like to congratulate and thank, our team worldwide for receiving this recognition.
And good morning, Eric and thank you for the question. So let's start off with medical because that is probably the cleanest and easiest to understand medical is tracking exactly as we expected.
We're going to see 100 million dollar decline through related to one large customer.
That by some new product launches that we have in roughly the $50 million range.
And so that one is going exactly as expected.
Industrial we are seeing significant weakness in Europe, particularly related to smart metering.
Product line.
And it's being offset by growth that we're seeing in North America, specifically related to charging station and also some benefit that we're seeing.
C market.
Operator: We are winning together the Kimball way, and I'm excited about what's ahead for us. Ladies and gentlemen, and let's... Ladies and gentlemen, analysts may ask a question at this time by simply pressing star 1 on your dial pad. You may remove yourself from the queue by pressing star 2 on your dial pad.
Automotive.
It's really a mixed bag because what we're seeing a softening in the European market I will tell you in Europe across the board, it's just really tough right now.
And in Europe.
<unk> generally speaking where the declines are coming from it is very clear to Europe.
On automotive in North America is holding in relatively flat, we saw minor disruptions as a result of the UAW strike, we don't anticipate seeing any more construction come through for the remainder of the fiscal year.
Derek Soderberg: We ask that if you are using a speakerphone, you pick up your handset before asking your question. One moment please for the first question. Our first question comes from Derek Soderberg from Cancer Fitzgerald, your line is now open, please go ahead. Yeah, good morning, everyone.
And in China, We also had some nice pockets of strength in the automotive sector.
Yeah.
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Rick Phillips: Thanks for taking the questions. I wanted to just touch on the current environment by end market. It seems like industrial has pockets of strength, medical sort of tracking as expected. Can you talk a bit about where the incremental weakness is coming from by end market that's sort of leading to the revision in the outlook? I would imagine you're feeling some of the impact of the UAE strike.
In North America, but in China, those sales have been really strong.
Okay.
Got it and.
Is any of the weakness in Europe I know you obviously have operations in Poland. You just expanded in the prepared remarks you.
You mentioned, some geopolitical uncertainty you've got a conflict in the Red Sea there shipping rates are up.
Rick Phillips: Is the incremental weakness you expect for this year largely in automotive or really is it broad-based? A good morning, Derek, and thank you for the question. So let's start off with medical because that is probably the cleanest and easiest to understand, medical is tracking exactly as we expect, which is, we're going to see a hundred million dollars, related to one large cut. Offset by some new product launches that we have and, and so that one is going exactly, industrial, we are product. It is being offset by, www. HendiSusanto.com and also some dentists that Automotive, is really a mixed bag because what we're, Softening in the European market. I will tell you Europe across the board is just really tough, and if you're looking at generally, from, and it's very clear.
I'm wondering if that played a sort of a quantifiable impact to how youre thinking about the rest of this year and if that's not the case I guess channel what are you seeing in the out quarters, leading to the lower operating income guidance.
So we have seen disruptions in the Red Sea, we actually ended up sending letters to all of our customers related to that and that.
Right.
Hum and upon us as a supplier to be able to ship and distribute product to the customers who are actively waiting on it so.
We are doing our best to find alternative opportunity for.
Right.
I'm not going to blame it on shipping in the Red Sea, though like you are really seeing now is a true slowdown.
Europe.
A lot of it has to do with what we saw and 'twenty two and 'twenty three.
And if you'll notice we took out the language of the push out.
Has described it last year relative.
Rick Phillips: Automotives in North America is holding in relatively flat. We saw minor disruptions as a result of the UAW strike. We don't anticipate seeing any more disruptions, here. And in China, we also have some.
Relative to customers pushing out demand this feels more like.
It was on a lot of inventory.
There was a shortage and scarcity of product availability.
Took as much as they could from us and now they are sitting on a lot of inventory.
Work through.
And so we know that that will correct itself over time, but what it's causing us to temper growth.
Derek Soderberg: Got it, got it. And just on, yep. Go ahead. I just want. You can take it. No, you can take it, Jeff. Got it. And is any of the weakness in Europe?
Near term Choppiness.
They've got excellent that inventory pushed through to the end market and then we redo our.
What I was referring to you as a normal.
The cadence of growth.
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Rick Phillips: I know you obviously have operations in Poland, you just expanded in the prepared remarks, you mentioned some geopolitical uncertainty, you've got a conflict in the Red Sea, their shipping rates are up. I'm wondering if that played sort of a quantifiable impact to how you're thinking about the rest of this year. And if that's not the case, I guess, Jana, what are you seeing in the outquarters leading to the lower operating income? So we have seen disruptions in the red. We actually ended up sending letters to all of our customers. You know, it's incumbent upon us as a buyer, product to the customers who are asking. We are doing our best to find... I'm not going to blame it on, www. HendiSusanto.com, A lot of it has, what we saw.
And then you have to work newsletter and diversify and then you sort of get back to a steady state.
Right.
Okay.
Yeah, well I appreciate the detail if I could just squeeze one more in Ricky.
Rick you mentioned some strength in North America around industrial.
Did mention.
Clean and green.
Some HVAC charging station seems like that's a growing opportunity for you guys is there any way for Kimball to sort of play in the manufacturing tax credits tied to the inflation reduction Act.
Would you have to.
Re shift manufacturing to Jasper for that is that a real opportunity for you guys.
It's certainly something that we talk about yes.
We see and we see them, we like the strength in North America around those areas.
Rick Phillips: And if you'll notice, we took out, to reach out, and others. Thank you. This feels more like, on a lot of There was a shortage of, for more information, for a moment.
There were.
Rick Phillips: All right. Thank you. All right, and now they're sitting on a lot of and we know that that will correct itself, for what it's caused, www. HendiSusanto.com got to get that, and Markit, what I, are CCO like, and Gary Burkhart. 2021 where there was a scarcity of toilet paper. Everybody ran out and bought as much as they could, and then you have to work for your toilet paper supply.
As you know of our North American manufacturing network, and and we have customers that want to talk to us about it all the time. So that's certainly an opportunity that we're continuing to explore and and could be upside.
Awesome really appreciate it thanks.
Yeah.
Our next question today comes from Griffin Buck from B Riley. Your line is now open. Please go ahead.
Hi, Rick Janet Thanks for taking my questions. So first on the working capital front, we saw.
Derek Soderberg: Yep. Well, I appreciate the detail. If I could just squeeze one more in.
Material step up in days sales outstanding in the quarter.
Rick Phillips: Rick, you mentioned some strengths in North America around industrial. You did mention, you know, clean and green, you know, some HVAC charging stations. Seems like that's a growing opportunity for you guys. Is there any way for Kimball to sort of play in the manufacturing tax credits tied to the Inflation Reduction Act?
Just curious what your expectations are going forward for this year and then longer term as it relates to our two receivables.
Yeah. So I'll take that question good morning risks Griffin.
We have a lot of work to do here right and that's in partnership with our customers because as you know we weren't wearing according to the demands of our customer placed on us and DNR. So everything we ordered 52 weeks ago 39 weeks ago 26 weeks ago is showing up.
Rick Phillips: You know, would you have to reshift manufacturing to JASPER for that? Is that a real opportunity for you guys? It's certainly something that we talk about, yes. You know, we see and we like the strength in North America around those areas.
And as the demand forecast is moving out from.
That inventory is continuing to build we're working through it with customers in a variety of ways right. So some of it is gonna be a cash deposits from customers. Some of it is going to be.
I know of.
Inventory for customers some of it is carrying charges on inventory, although my preference right now not carrying charges its cash rich.
As you know in this type of environment.
I would expect that our DSO and our pds or rates need to come down.
Griffin Bath: You know, we're proud, as you know, of our North American manufacturing network. And we have customers that, you know, want to talk to us about it all the time. So it's certainly an opportunity that we're continuing to explore and could be upside down. Awesome, really appreciate it. Thanks. Our next question today comes from Griffin Bath from B Reilly, your line is now open please go ahead. Hi Rick, Jenna, thanks for taking my questions. So first on the working capital front, we saw material step up and day sales outstanding in the quarter. Just curious what your expectations are going forward for this year and then longer term as it relates to receivables. So I'll take that question before I move on.
As I've previously said enjoyment and swing too far and so we've really got to work on that.
Our receivables.
That more in line with our contractual agreements with our customers.
Working capital is.
These are focused right now.
And so in relieving the inventory, but seeing it all the way through.
The impact that would have on your balance sheet in terms of debt relief.
Got it okay. Thanks, Jennifer the color there and then so just turning to medical I understand obviously the fiscal year 'twenty four guide accounts for the $100 million reduction in sales related to that FDA recall the major medical customers. So can you just remind us I'm not sure. If you said in the past when do you expect that.
Call it to be Remediated does as the program start to hit the top line again and <unk> 25 or is it later in 2025 or is that do not have that visibility.
Yes, we really don't what we've tried to be Griffin is really conservative about that.
Jana Kroon: We have a lot of.., right, and it's in partnership with our customers, so everything we ordered, and others. Thank you. Thank you, and ask the demand forecast. We're working through it with customers in a variety of ways, right, so some of it, cash deposits from, and others, some of it. Although, my preference right now is not carrying.., as you know in this type.
I think we've said before we continue to.
Have a great relationship with that customer we are discussing multiple opportunities at any point in time, and we stand ready to support.
But we've tried to be really conservative and not built that into our expectations. One one point on medical outside of that customer.
Jana Kroon: I would expect that our DSO and our... Get that more in line, are. Got it. Okay, thanks, Jennifer, the color there.
You can probably do the back math on but.
Rick Phillips: And then so just turning to medical, I understand, obviously, the fiscal year 24 guide accounts for the $100 million reduction in sales related to that FDA recall of a major medical customer. So can you just remind us, I'm not sure if you said in the past, when you expect that recall to be remediated? Does the program start to hit the top line again?
As Janice said, we were really on expectations overall and haven't changed.
<unk> expectations for 2024, and our medical growth in Q2 would've been high single to low double digits outside of that reduction from that one customer. So we are making progress we continue to see wins coming in and we're really optimistic about about medical long term, but but to directly answer your question, we've not built in.
Rick Phillips: And, you know, 1Q25? Or is it later in 2025? Or is that do not have that visibility?
Rick Phillips: Yeah, we really don't. What we've tried to be, Griffin is really conservative about that. You know, as I think we've said before, we continue to have a great relationship with that customer. We're discussing multiple opportunities at any point in time, and we stand ready to support. But we've tried to be really conservative and not build that into our expectations.
Any.
Any expectations related to that program started.
Okay, Alright fair enough Rick well, thanks for the color I appreciate you guys taking my questions.
Rick Phillips: One point on medical outside of that customer that, you know, you can probably do the back math on, but, you know, as Janice said, we were really on expectations overall and haven't changed those expectations for 2024. And our medical growth in Q2 would have been high single to low double digits outside of that reduction from that one customer. So we are making progress. We continue to see wins coming in, and we're really optimistic about medical long term. But to directly answer your question, we've not built in any expectations related to that program restarting.
Thank you.
Right.
Our next question comes from Jason Smith from Lake Street. Your line is now open.
Hey, guys. Thanks for taking my questions understanding that there had been push outs here just given the macro but just curious if you're seeing any issues with decommit Berg cancellations within your backlog.
Yeah.
We have seen yet he can nursing cancellations come through with our backlog, which as you know it's not usual in this business.
Italy.
We've got firm orders, you've got volume you can see it out far away now they haven't been huge and they have been geographically focused.
Griffin Bath: Okay, alright, fair enough Rick. Well, thanks for the call, I appreciate you guys taking my questions. Thank you. Thank you. Bye.
<unk> seen them.
Jaeson Allen Min Schmidt: Our next question comes from Jaeson Schmidt from Lake Street, your line is now open. Hey guys, thanks for taking my questions. Understanding that there have been pushouts here, just given the macro, but just curious if you're seeing any issues with decommits or cancellations within your backlog, have. Yeah, with our backlog, which, as you know, is not usual. Normally, you've got firm orders, you've got volume, you can see it out far away. Now, they haven't been huge, and they have been geographically focused. A good example is European...
Good example is Europe industrial.
We saw significant shifts that where quite honestly unexpected.
So we work with the customer on on what that looks like and we partner through it.
It's really interesting because we've had a solid ramp of new program launches and NPI, where we're seeing some of the softening come through our existing program that has been in places for years, where we're we're seeing Decommit Campbell.
And some of the shop.
Okay. That's really helpful color and then just following up on that I know you. Just gave the example of industrial but are those decommit. Your cancellations concentrated in one of your segments or is it pretty broad based.
Yes.
Rick Phillips: So, we work with the customer on what that looks like, really, because we've had a solid ramp of new programs.. .. Okay, that's really helpful, Culler. And then just following up on that, I know you just gave the example of industrial, but are those decommissure cancellations concentrated in one of your segments or is a pretty broad base?
Medical is actually tracking really well and so it's it's it's strange to us because you know one of our peers highlighted medical as a softening a vertical for them for us that's actually going exceptionally well industrial is really where we're seeing more.
Softening in struggle and so I think it depends on and each vertical where you play.
Rick Phillips: Medical is actually tracking really well, and so it's strange to us because, you know, one of our peers highlighted medical as a softening vertical for them. For us, that's actually going exceptionally well. Industrial is really where we're at. To learn more, go to www. FEMA.gov, and so I think it depends on... That's it for us. Subsoftening in European Automotive again.
And your your customer mix.
That's it for us.
I had some softening in European automotive again, that's really a result of just the economy and what they're experiencing there in North America is chugging along as expected.
Yeah.
Gotcha, and then just last one for me and I'll jump back into queue with almond and dynamics across your business and maybe some mix shifts here and there at a high level, how should we think about gross margin through the remainder of calendar 'twenty four.
Rick Phillips: Gotcha. And then just last one for me, and I'll jump back into Q. With all the dynamics across your business, and maybe some mixed shifts here and there, at a high level, how should we think about gross margin through the remainder of calendar 24? Yeah, that's a, that is a great question, product, and really, we are, https://www.hendi-susanto.com You know, if you look at our gui- and I know you didn't ask. You just gotta hunker down.
Yeah, that's a that is a great question.
We're working through product mix for the remainder of the right now.
And really understanding where our materials and labor costs are going to shake out as a percentage of net sales.
You know if you look at our guidance range for the full fiscal year <unk>. What that tells you is.
Our gross margin is going to be somewhere in the range of where you've seen it for the last two quarters.
The dish level.
We're only going to do everything that we can turn them.
Cost containment and alignment.
And then I know you didn't ask about SG&A, but.
Laser focus there reducing all the costs.
We can and where appropriate without sacrificing long term growth, we just got a hunker down.
Get through it.
Bottom line.
Jaeson Allen Min Schmidt: Okay. No, I really appreciate all that, Collar. Thanks a lot, guys. And one thing I will note.., and ask about what I would like to say, it was. Thank you very much.
Okay, No really appreciate all that color. Thanks, a lot guys.
One thing I will note that cases didn't ask about but I would like to say on the open mic.
It was a very thoughtful decision by the leadership team to align costs with the current environment.
Jaeson Allen Min Schmidt: What we have told you is, we're not going to talk about.., or we're not going to have any of those comments, much, slide into the event, www. HendiSusanto.com, Our next question today comes from Anja Söderström from Sudoti. Your line is now open, please go ahead.
What we have told you is we're not going to talk about bifurcated or after we're not going to have any of those conversations anymore.
You know take the absorption.
Don't respond we really felt like it was incumbent upon us to make the decision to control the costs, where we could and not too.
The margin.
No.
Slide into the.
Yes.
And so we are we are working significantly on that.
Our next question today comes from and yet <unk> from Sidoti. Your line is now open. Please go ahead.
Anja Söderström: Hi, and thank you for taking my question. So I have some follow ups on the question. So in terms of the medical customer where they're remediating a product, are you exclusive with that customer on that product?
Hi, Thank you for taking my questions I have some follow ups on the question sorry in terms some of the medical customer whether or maybe adding a product.
Exclusive with that customer on that product or could you be working if this was going to be a prolonged and their competitors taking share so you're going to be able to work with a competitor isn't that.
Rick Phillips: Or could you be working if this is going to be prolonged and their competitors taking share? So you're going to be able to work with the competitors on that? Yeah, we do have other customers in the oxygen and ventilator business who we are working with and are seeing an increase in intake. So yes, we do work across that part of the business with multiple customers. Okay, thank you. And Jana, you were talking about, The weakness in Europe, and you mentioned the inventory adjustments there, is that mainly the reason for the weakness there, or do you also see a broader economical weakness?
Yes, we are we do have other customers in the oxygen and ventilator business, who we are working with and are seeing an increase in intake. So yes, we do work across that part of the business with multiple companies.
Okay. Thank you.
I know you were talking about.
The weakness in Europe, and you mentioned the inventory inventory adjustments there is that mainly that the reason for the weakness there or do you also see a broad economic weakness.
Anja Söderström: Edge Pryor, © The Bulletproof Executive 2013, We are. Okay, thank you Anna. We're getting, and Data Daily. Okay, thank you. And one last one is related to the taxes and the revenue mix that North America was doing better than the other regions. I noticed taxes are higher in, Should we expect those to continue to be higher as North America might continue to be stronger or how should we think about the taxes going forward? Yeah, and you nailed it. The tax rate is really a direct impact, it's just the mix of where sales.., www.
Its prior economic weakness.
The broader economic weakness is just exacerbating the inventory.
Talent.
Okay.
We are seeing some time, okay. Thank you Anna.
And they are coming out in the near future.
We're getting data daily.
Okay.
Yeah.
Okay. Thank you.
One last one is related to the taxes and the revenue mix in North America.
I was doing.
Better than the other regions I noticed taxes are higher.
Should we expect those to continue to be higher North America continued to be stronger or how should we think about the taxes going forward.
Yeah.
You nailed it.
Tax rate is really a direct impact just the mix of where sales are coming from geographically.
Jana Kroon: HendiSusanto.com, We expect to control that, but I would say is a and more in that. Okay, great. Thank you. That was all for me. Just a reminder, if you would like to ask a question, please press start, followed by 1 on your telephone keypad. If you change your mind, please press start, followed by 2.
We expect to control that as much as we can you know.
Tax arbitrage opportunity, but I would say is that our effective tax rate in the mid twenties.
As Lei.
You should expect.
Somewhere in that 20.
26 range.
Okay, great. Thank you that was all for me.
Thanks Tanya.
Just a reminder, if you would like to ask a question. Please press star followed by one on your telephone Keypad AC change your mind. Please press star followed by.
Anja Söderström: Our next question comes from Tim Moore from EF Hutton. Your line is now open, please go ahead. Janna, thanks for adding the open orders amount to the press release going forward. So, I was wondering maybe just on the backlog open orders. You know, you mentioned EV chargers, we've got the HVAC climate control, the public safety, but can you, Rick, maybe just highlight any other areas are going well? I remember last time, what the towing systems for EV trucks and SUVs to, you know, not drain the battery.
Our next question comes from Tim Moore from Es Hudson. Your line is now open. Please go ahead.
Janet Thanks for adding the open orders amount to the press release going forward.
I was wondering maybe just on the backlog the open orders.
You mentioned EV Chargers, you've got the HVAC climate control the public safety.
Can you maybe just highlight any other areas are growing well I remember last time, what the towing systems for EV trucks and Suvs to.
No im not draining the battery if you could just maybe you said late than anything else its growing pretty good youre seeing pretty good interest on orders.
Tim Moore: If you can just maybe shed light on anything else, it's growing pretty good. You're seeing pretty good interest in order. Yeah, so... We emailed a lot of it.
Yeah. So.
There's a lot of it where we're seeing you know in terms of charging station new medical customers, that's going well.
Rick Phillips: We're We're, you know, in terms of charging station, new medical customers, that's going well, automotive, North America, going really well, go in well, product. Thank you. Thank you. Thank you. Great, that's helpful.
Otis North America steering and braking.
And really well also automotive in China.
It's going well for us we've got some.
The new product and program launches that we're gonna see there that are encouraging and exciting.
Offset by some inventory that we've got to work through any softening in Europe.
Great that's helpful.
Tim Moore: You know, just shifting gears, maybe I'd love to hear maybe what Rick's appetite and your appetite is for M&A. Is there still, you know, willingness maybe to do medical as the priority near term? You know, I know you've got the corporate development team in place. Has anything changed around that for your kind of appetite and potential timing?
And then just shifting gears, maybe I'd love to hear maybe what Rick's appetite and your appetite is for M&A is there still a willingness maybe to do medical is the priority near term I know you've got the corporate development team in place.
Has anything changed around that for your kind of appetite, but that's the timing.
Rick Phillips: Yeah, I think, you know, our thinking probably hasn't shifted significantly of late, Tim. It's obviously something we never ignore, and we continue to monitor opportunities. You know, we do see a really healthy funnel, as Jana mentioned. And, you know, as we look forward in the out years, you know the lead time on wins. I mean, we see some really nice wins.
Yeah, I think our thinking probably hasnt shifted significantly of late Tim. It's obviously, something we never ignore and and we continue to monitor opportunities.
We do see a really healthy funnel as Janet mentioned and.
We as we look forward in the out years, you know the <unk>.
Lead time on wins I mean, we see some really nice wins, we we like the places that we're playing and so we think the organic growth opportunities are a really robust and as Janice said. We also are working on the balance sheet to free up and create flexibility for the future. So I wouldn't say.
Rick Phillips: We like the places that we're playing. And so we think the organic growth opportunities are really robust. And as Jana said, we also are working on the balance sheet, you know, to free up and create flexibility for the future. So I wouldn't say, you know, we're ever out of the game, but we're really focused organically right now.
Wherever out of the game, but where.
We're really focused organically right now and we think thats the right place given the balance sheet and given the.
Tim Moore: And we think that's the right place given the balance sheet and given the opportunities that are coming our way. Yeah, that's good. It would be one of our customers, a particular program, and they want us to take on the higher level assembly and they're going to drop out that, and we're going to take it over, and then in some cases. Current Macroeconomic Environment, because it causes our customers to evaluate their own.., www. HendiSusanto.com, Janet, you beat me to it. That was exactly going to be my next point.
The opportunities that are coming our way.
Okay. That's good.
Got.
It would be one of our customer deciding that they don't want to produce a particular program or bucket.
And they want us to take on a higher level assembly and theyre going to drop out that business and we're gonna take it over them and in some cases, the current macro economic environment is interesting because it causes our customers to evaluate their own margin improvement opportunity and ways that we can partner with them to solve that.
So if you were to see us do something on that front it would be in that vein.
Hey, Jamie beat me to it that was exactly going to be my next point, that's what you're asking the question is I know I've talked with you and Rick about that before you've actually had some customers come to you I mean, I don't know if they've been proposing it themselves, but it would seem like you have a lot of organic or hybrid opportunities on the medical front with taking some work off other people's Cleat, where it's not a big focus for them.
Tim Moore: That's why I was asking the question, because I know I've talked with you and Rick about that before. You've actually had some customers come to you. I mean, I don't know if they've been proposing it themselves, but it would seem like you have a lot of organic or hybrid opportunities on the medical front with taking some work off other people's plates where, you know, not a big focus for them. They might have higher margin businesses that they care about or allocating capital.
Might have higher margin businesses that they care about or allocating capital to.
Tim Moore: That's good. That's good. And again, I just got one last question. Regarding your Investor Day, I think you might be doing one this year, do you still plan on maybe laying out the dollar amount range and maybe the rough timing of global capital expenditures for plant expansion, you know, cadence by year, or is that maybe on hold a little bit due to the macro slowdown? And do you have any rough range of when maybe your Investor Day might be? Is it going to be this spring?
That's good that's good and then I just got one last question.
Regarding your Investor day.
I think it might be doing one this year do you still plan on maybe laying out.
The dollar amount range of maybe the rough timing of global capital expenditures for our pilot plant expansion cadence by year.
Where is that may be on hold a little bit due to the macro slowdown.
And do you have any rough range of when maybe your investor day might be is it going be the spring.
Tim Moore: So the investor day wouldn't be this spring. If we were going to do the investor day, it would be this fall. And the only reason for that.
So the Investor day wouldn't be this spring if we were gonna do the Investor day. It would be this fall and the only reason for that is.
Need more data.
And so as we continue to look at FY 'twenty, five 'twenty six and beyond.
Jana Kroon: We need more data, right? to look at FY25. We really need the market to settle out, www. HendiSusanto.com I've worked, in terms of growth, expansion, internally, a blue For more information visit www.
We need the market to settle out on and to see sort of where we're shaking out in terms of.
The trajectory in terms of growth expansion.
Internally, we certainly have a blues plan and our strategic plan for future expansion.
Quite honestly, Tim if I were to come out to you right now and tell you that I'm expanding in other region of the World you would not be happy with me [laughter] makes us that's why.
Jana Kroon: FEMA.gov, Quite honestly, Kim, if I were to come out to you right now and tell you that I'm expanding, I'm glad it got moved out. We put a lot of effort into it. We also recognize that, What we've got has to work harder, before we ask.
That's why I was asking I'm glad I got moved out.
[laughter]. So yeah, Wow again, certainly we have that strategic plan and we've put a lot of effort into it. We also recognize that in this current environment. What we've got have to work harder before we add on to it in the future.
Jana Kroon: Great. That's really what I want to hear. I'm glad it's not going to be in the next month. Yeah, no, it makes sense.
Great that's really what I wanted to get a read it's not getting in the next months yes.
Yes, no. It makes sense as you pointed out it happens Todd a lot of other companies that you're not the first one and this burden slowdowns pretty much globally now in some pockets. So that's really great and I'm looking forward to the Investor day in the fall or whenever it is and I'm glad it's not next month. So thanks, a lot and that's it for my questions.
Tim Moore: Just wait it out. It happens. A lot of other companies, you're not the first one in this boat and blowdowns pretty much globally now in some pockets. So that's really great. I'm looking forward to the investor day in the fall or whenever it is, and I'm glad it's not next month.
Tim Moore: So thanks a lot. And that's it for my question. Everybody get on your end, Tim. Yes, yes, we had our first child born yesterday afternoon, a baby boy, and mom's doing well, and so is the baby, but thanks for asking.
Thanks, Tim everybody get on your own time.
Yeah.
Yes, Yes, we had our first child born yesterday afternoon, our baby boy and moms doing well so David Thanks for asking.
Operator: Congratulations! It's wonderful. Thanks, Janet, Rick, and Andy. Take care. All the best.
Congrats.
Wonderful.
Hey, Thanks, Dan, Eric and Andy take care.
Oh best.
Operator: Thank you everyone. That concludes today's Q&A portion of the call. There will be a replay available after today's call. The details for this are as follows. Please dial plus one nine two nine four five eight six one nine four. The access code to this is eight four eight one four nine. Thank you everyone. That concludes today's call, www. HendiSusanto.com
Thank you everyone that concludes today's Q&A portion of the call there will be a replay available after today's call details for this are as follows. Please.
Please dial plus one nine to 9586194 the access code is 848149. Thank you everyone that concludes today's call.
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