Q3 2024 Kimball Electronics Inc Earnings Call
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Carla: Good morning, ladies and gentlemen. Welcome to the Kimball Electronics third quarter fiscal 2024 earnings conference call. My name is Carla, and I will be the facilitator for today's call. All lines have been placed in listen-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 the star and then the number one on your telephone keypad.
Good morning, ladies and gentlemen, welcome to the Kimball electronics third quarter fiscal 'twenty 'twenty four earnings Conference call. My name is Carla and I will be the facilitator for today's call. All lines have been placed in a listen only mode to prevent any background noise.
Carla: After the completion after you prepared remarks from the Kimball electronics leadership team there.
Carla: There will be a question and answer period to ask a question simply press Star and then the number one on your telephone keypad today's call made may H 'twenty 'twenty four is being record.
Carla: Today's call will be made on May 8th, 2024. It 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.
Andrew D. Regrut: A replay of the call will be available on the Investor Relations page booklet Kimball electronics website at this time I would like to turn the call over to Andy regrouped Vice President Investor Relations. Mr. Regrouped you may begin.
Andrew D. Regrut: Thank you, operator, and good morning everyone. Welcome to our third 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 third quarter of fiscal 2024. 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. Our commentary today will be focused on adjusted non-GAAP results. Reconciliations of GAAP to non-GAAP amounts are available in our press release.
Andrew D. Regrut: Thank you operator, and good morning, everyone.
Andrew D. Regrut: Welcome to our third quarter conference call with me here today is Rick Phillips, our Chief Executive Officer.
Andrew D. Regrut: Santa Cruz Chief Financial Officer.
Andrew D. Regrut: We issued a press release yesterday afternoon with our results for the third quarter of fiscal 2024.
Andrew D. Regrut: To accompany todays call a presentation has been posted to the Investor Relations page on our <unk>.
Andrew D. Regrut: Any web site.
Andrew D. Regrut: 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 filings and that actual results can differ materially from the forward looking statements. Our commentary today will be focused on adjusted non-GAAP results reconciliations of GAAP.
Andrew D. Regrut: non-GAAP amounts are available in our press release.
Andrew D. Regrut: This morning, Rick will start the call with a few opening comments. Jana will review the financial results for the quarter and guidance for fiscal 2024, and Rick will complete our prepared remarks before taking your questions. I'll now turn the call over to Rick. Thanks, Hendi, and good morning, everyone.
Andrew D. Regrut: This morning, Rick will start the call with a few opening comments Jen will review the financial results for the quarter and guidance for fiscal 2024, and Rick will complete our prepared remarks before taking your questions I'll now turn the call over to Rick.
Rick: Thanks, Andy and good morning, everyone.
Richard D. Phillips: As you know, I recently completed my first year at Kimball Electronics. It's been a good journey already, and I am excited about the future of the company. Before I get into our Q3 results, I want to share some observations on the business and provide an update on our strategic direction and structure moving forward. Firstly, I mentioned early on that I was drawn to the Kimball opportunity for a number of reasons, but at the top of my list were the outstanding company culture and the opportunity to build on a strong foundation to achieve significant value creation. My experiences so far have confirmed those views.
Rick: As you know I recently completed my first year at Kimball electronics.
Richard D. Phillips: It's been a good journey already and I'm excited about the future for the company.
Richard D. Phillips: Before I get into our Q3 results I want to share some observations on the business and provide an update on our strategic direction and structure moving forward.
Richard D. Phillips: Firstly I mentioned early on that I was drawn to the Kimball opportunity for a number of reasons, but at the top of my list, where the outstanding company culture and the opportunity to build on our strong foundation to achieve significant value creation.
Richard D. Phillips: My experience is so far have confirmed those perspectives.
Richard D. Phillips: We've spent a great deal of time visiting our locations, meeting with customers, and working with our leadership team to complete an in-depth review of our strategic focus, vertical market structure, and organization to date. Based on that review, we are announcing steps today to sharpen our strategic focus and to further position the company for profitable growth and stronger performance moving forward. Those steps, which we have taken recently or are taking now, include the following.
Richard D. Phillips: We spent a great deal of time visiting our locations meeting with customers and working with our leadership team to complete an in depth review of our strategic focus vertical market structure and organization design.
Richard D. Phillips: Just on that review, we are announcing steps today to sharpen our strategic focus and to further position the company for profitable growth and stronger performance moving forward.
Richard D. Phillips: Those steps, which we have taken recently or are taking now include the following.
Richard D. Phillips: First, divesting our automation test and measurement business. While this business has a bright future ahead, it is not a good strategic fit for Kimball and our goals for the future. The business models are not synergistic, and it is imperative that we focus on the growth opportunities in our core EMS business. We are still an active customer of AT&T.
Richard D. Phillips: First divesting, our automation test and measurement business.
Richard D. Phillips: While this business has a bright future ahead. It is not a good strategic fit for Kimball and our goals for future growth.
Richard D. Phillips: The business models are not synergistic and it is imperative that we focus on the growth opportunities in our core EMS business. We are still in active customer of the ATM business.
Richard D. Phillips: Next, increasing the focus and support for our core EMS business, including realigning our medical solutions business unit in Indianapolis into our EMS medical vertical for further differentiation. Consistent with these structural moves, we have elevated two key executives to enterprise-wide operations and commercial responsibility: Steve Korn as Chief Operating Officer and Kathy Thompson as Chief Commercial Officer.
Richard D. Phillips: Next increasing the focus and support for our core EMS business, including realigning our medical solutions business unit in Indianapolis into our Ams medical vertical for further differentiation.
Richard D. Phillips: Consistent with the structural moves we have elevated two key executives to enterprise wide operations and commercial responsibility, Steve Kerr as Chief operating officer, and Kathy Thompson as Chief Commercial officer.
Richard D. Phillips: In addition, we are responding to this period of end market softness by controlling what we can control, including resizing our team, taking specific cost actions, and continuing to focus on significant working capital. We recorded impairment and restructuring charges in the third quarter to support some of these actions. Jana will provide additional detail in a few moments.
Richard D. Phillips: In addition, we are responding to this period of end market softness by controlling what we can control, including resizing our team taking specific cost actions and continuing to focus on significant working capital improvements.
Richard D. Phillips: We recorded impairment and restructuring charge in the third quarter to support some of these actions.
Jana: <unk> will provide additional detail in a few moments.
Richard D. Phillips: As we anticipated, the operating environment remained challenging for the EMS industry, and our sales in the third quarter declined. We expect the macro headwinds to persist in fiscal 2020. During this period of end-market softness, we are taking action by proactively aligning our cost structure with short-term demand trends, remaining competitive with stable operating margins, and focusing on working capital.
Richard D. Phillips: As we anticipated the operating environment remains challenged for the EMS industry and our sales in the third quarter declined.
Richard D. Phillips: We expect the macro headwinds to persist in fiscal 2025.
Richard D. Phillips: During this period of end market softness we are taking action by proactively aligning our cost structure with short term demand trends.
Richard D. Phillips: Remaining competitive with stable operating margins and focusing on working capital improvements.
Richard D. Phillips: Notably.
Richard D. Phillips: Inventory levels are now down over $90 million from the prior year. We continue to make investments in longer-term growth opportunities that are supported by a robust funnel of new business in the next 18 to 24 months, while deploying a capital allocation strategy that balances organic growth, lasting customer relationships, and returning cash to shareowners with opportunistic share returns. Net sales in the third quarter totaled $425 million, a 12% decrease from the prior The decline was shared across the three vertical markets we support, with softness in each region of our global footprint.
Richard D. Phillips: Inventory levels are now down over $90 million from the peak.
Richard D. Phillips: We continue to make investments in longer term growth opportunities that are supported by a robust funnel of new business in the next 18 to 24 months, while deploying our capital allocation strategy that balances organic growth.
Richard D. Phillips: Lasting customer relationships and returning cash to shareowners with opportunistic share repurchases.
Richard D. Phillips: Net sales in the third quarter totaled $425 million, a 12% decrease from the prior year.
Richard D. Phillips: The decline was shared across the three vertical markets, we support with softness in each region of our global footprint.
Richard D. Phillips: On a sequential basis, however, sales increased $4 million, or nearly 1%, which is impressive given the 32% growth we experienced in the prior quarter. We estimate, on a two-year stack basis, the growth in each of our verticals is in the low to mid.
Richard D. Phillips: On a sequential basis, however, sales increased $4 million.
Richard D. Phillips: We're nearly 1% which is impressive given the 32% growth we experienced in the prior year quarter.
Richard D. Phillips: We estimate on a two year stack basis the growth in each of our verticals is in the low to mid teens.
Richard D. Phillips: Although we are anticipating year-over-year declines next quarter, we do expect sequential growth over Q3. Net sales in the automotive vertical, the largest, were $202 million, down 9% compared to Q3 last year and 47% of total company sales. The decline this quarter was driven by continued weak demand in Europe, incremental softness in North America, and a decline in China. When comparing Q3 sales to last quarter, North America and Europe both posted sequential
Richard D. Phillips: Although we are anticipating year over year declines next quarter, we do expect sequential growth over Q3.
Richard D. Phillips: Net sales in the automotive vertical our largest business were $202 million down 9% compared to Q3 last year and 47% of total company sales.
Richard D. Phillips: The decrease this quarter was driven by continued weak demand in Europe incremental softness in North America, and a decline in China.
Richard D. Phillips: When comparing Q3 sales to last quarter, North America, and Europe, both posted sequential increases.
Richard D. Phillips: We continue to believe the longer-term opportunity for growth in the automotive industry will be driven by an increase in the rate at which electronic content is being added to vehicles, specifically in steering and braking. This content leverages advanced technologies and expanded operating systems that align very well with our core manufacturing capabilities and proven expertise in safety-critical products, which ideally positions us for further advancement. As we've stated numerous times, the architectures of the steering and braking systems are agnostic to vehicle type, internal combustion engines, EVs, or hybrids, and that the automotive industry is highly regulated with stringent certifications, validation protocols, and change management.
Richard D. Phillips: We continue to believe the longer term opportunity for growth in automotive will be driven by an increase in the rate at which electronic content is being added to vehicles, specifically in steering and braking systems.
Richard D. Phillips: This content Leverages advanced technologies, and expanded operating systems that align very well with our core manufacturing capabilities and proven expertise in safety critical products, which ideally positions us for further advancements.
Richard D. Phillips: As we've stated numerous times the architectures of the steering and braking systems are agnostic to vehicles tightened internal combustion engines, evs or hybrids and that the automotive industry is highly regulated with stringent certifications validation protocols and change management systems. So this business is sticky and often results in probe.
Richard D. Phillips: So this business is sticky and often results in program life cycles that can span 8-10 years in length with single sources. Net sales in our medical vertical were $113 million, a 17% decrease compared to Q3 last year and 27% of total company. The decline this quarter was driven by lost sales with a major customer involved in an FDA recall, partially offset by growth with other customers. As a reminder, our annual guidance assumes a net $50 million reduction in medical sales from this dynamic.
Richard D. Phillips: Graham life cycles that can span eight to 10 years in length with single source Awards.
Richard D. Phillips: Net sales in our medical vertical were $113 million, a 17% decrease compared to Q3 last year and 27% of total company sales.
Richard D. Phillips: The decline this quarter was driven by lost sales with a major customer involved in an FDA recall, partially offset by growth with other customers.
Richard D. Phillips: As a reminder, our annual guidance assumes a net $50 million reduction in medical sales from this dynamic that is a $100 million decrease in sales with the customer involved in the recall, partially offset by a $50 million increase in sales in new and existing programs.
Richard D. Phillips: That is, a $100 million decrease in sales with the customer involved in the recall, partially offset by a $50 million increase in sales in new and existing programs. Similar to the automotive industry, we continue to believe in megatrends in the medical industry, including an aging population, increasing access, and affordability to health care. Decreasing medical device sizes combined with the need for higher levels of precision, increasing connected drug delivery systems, and the industry-wide trend of outsourcing higher-level assemblies will contribute to our longer-term top-line growth.
Richard D. Phillips: Similar to automotive we continue to believe mega trends in the medical industry, including an aging population, increasing access and affordability to health care.
Richard D. Phillips: Decreasing medical device sizes, combined with the need for higher levels of precision.
Richard D. Phillips: Increasing connected drug delivery systems, and the industry wide trend of outsourcing higher level assemblies will contribute to our longer term top line growth.
Richard D. Phillips: We are strategically positioned to support technological advances in this vertical through Kimball Metals. Net sales in the industrial segment were $110 million, a 14% decrease compared to Q3 last year and 26% of total company sales. As a reminder, results for the AT&M Business are included in this vertical. In the third quarter, approximately half of the decline in sales in industrial resulted from year-over-year weakness in the AT&M business, with the balance driven by lower demand for internal climate control systems and smart meters in Europe, which, as we reported last quarter, have been commodities.
Richard D. Phillips: We are strategically positioned to support technological advances in this vertical through Kimball medical solutions.
Richard D. Phillips: Net sales in industrial $110 million.
Richard D. Phillips: A 14% decrease compared to Q3 last year and 26% of total company sales.
Richard D. Phillips: As a reminder results for the ATM business are included in this vertical.
Richard D. Phillips: In the third quarter approximately half of the decline in sales in industrial resulted from year over year weakness in the ATM business with the balance driven by lower demand for internal climate control systems and smart meters in Europe.
Richard D. Phillips: As we reported last quarter has been commoditizing.
Richard D. Phillips: Frequently referred to in the industrial sector as green and clean, products that promote energy efficiency, safety, carbon neutrality, and the better consumption of natural resources, including water, gas, and electricity. We see the megatrend in legislation and incentives supporting decarbonization as meaningful growth drivers, and we are strategically positioned to support products that reduce environmental pollution. So a quarter filled with a number of important developments. I'll now turn the call over to Jana for her insights on the financial results and a review of our guidance.
Richard D. Phillips: We frequently refer to industrial as green and clean with products that promote energy efficiency safety carbon neutrality, and the better consumption of natural resources, including water gas and electricity.
Jana: We see the Mega trend in legislation and incentives supporting the de carbonization as meaningful growth drivers and we are strategically positioned to support products that reduce environmental impacts.
Jana: So a quarter filled with a number of important developments.
Jana: Now turn the call over to Janet for her insights on our financial results and a review of our guidance Janet.
Jana T. Croom: Thank you, Rick, and good morning, everyone. As Rick mentioned a moment ago, our results this quarter included impairment associated with the AT&M business, as well as restructuring expenses in support of sharpening the strategic focus of the company. All in, the activity totaled $14.5 million after tax, or $0.58 per share, with goodwill and asset impairment equaling $14 million or $0.56 per diluted share, restructuring expense of $1.2 million or $0.05 per diluted share, partially offset by recovery of a legal settlement of $700,000 or $0.03 per diluted share. For clarity, my review of the financial results for the quarter will exclude these items.
Jana: Thank you Rick and good morning, everyone.
Jana T. Croom: As Rick mentioned, a moment ago. Our results. This quarter included impairment associated with the ATM business as well as restructuring expenses in support of sharpening our strategic focus of the company.
Jana T. Croom: All in the activity totaled $14 $5 million after tax or <unk> 58 per share.
Jana T. Croom: With goodwill and asset impairment equaling $14 million or <unk> 56 cents per diluted share.
Jana T. Croom: Restructuring expense of $1 $2 million or five cents per diluted share, partially offset by recovery of a legal settlement of $700000 or <unk> <unk> per diluted share.
Jana T. Croom: For clarity My review of the financial results for the quarter will exclude these items.
Jana T. Croom: Net sales in Q3 were $425 million, a 12% decrease compared to the third quarter of fiscal 2023. For context, the AT&M business contributed over 100 basis points to the decline. There was no impact from foreign exchange on consolidated sales year over year.
Jana T. Croom: Net sales in Q3 or $425 million, a 12% decrease compared to the third quarter of fiscal 2023 for.
Jana T. Croom: For context, the ATM business contributed over 100 basis points to the decline there.
Jana T. Croom: It was not an impact from foreign exchange on consolidated sales year over year.
Jana T. Croom: The gross margin rate in Q3 was 7.9%, a 100 basis point decline compared to 8.9% in the third quarter of fiscal 2023, with the decrease coming from lower absorption in our EMS manufacturing facilities and the AT&M business, both as a result of declining sales. Adjusted selling and administrative expenses in the third quarter were $16.6 million, an $800,000 decline compared to the adjusted results in Q3 of last year, primarily the result of lower bonuses. We are continuing to take a hard look at our cost structure in the current macroeconomic environment.
Jana T. Croom: The gross margin rate in Q3 was seven 9%.
Jana T. Croom: 100 basis point decline compared to eight 9% in the third quarter of fiscal 2023 with the decrease coming from lower absorption in our EMS manufacturing facilities and the ATM business. Both a result of declining sales.
Jana T. Croom: Adjusted selling and administrative expenses in the third quarter were $16 $6 million.
Jana T. Croom: And $800000 decline compared to the adjusted results in Q3 of last year, primarily the result of lower carbon.
Jana T. Croom: We are continuing to take a hard look at our cost structure in the current macro economic environment.
Jana T. Croom: When measured at the percentage of sales, adjusted selling and administrative expenses were 3.9%, a 30 basis point increase versus Q3 last year due to lower sales. Adjusted operating income for the third quarter was $17 million, or 4% of net sales, which compares to last year's adjusted results of $25.6 million, or 5.3% of net sales. Other income and expense was an expense of $6.3 million in the third quarter versus an expense of $3.3 million in Q3 of fiscal 2023.
Jana T. Croom: When measured as a percentage of sales adjusted selling and administrative expenses were three 9% a 30 basis point increase versus Q3 last year due to lower sales.
Jana T. Croom: Adjusted operating income for the third quarter was $17 million or 4% of net sales, which compares to last year's adjusted results of $25 $6 million or five 3% of net sales.
Jana T. Croom: Other income and expense was expense of $6 $3 million in the third quarter versus expense of $3 $3 million in Q3 of fiscal 2023 with.
Jana T. Croom: With the change resulting from higher interest expense this year, an outcome of elevated debt levels in the current interest rate environment and Foreign Currency Movers. The actual effective tax rate, skewed higher by the impacts of the impairment and restructuring charges, was approximately 52% in the third quarter of fiscal 2024. We continue to expect a consolidated tax rate in the mid-20s.
Jana T. Croom: With the change, resulting from higher interest expense this year and outcome of elevated debt levels in the current interest rate environment.
Jana T. Croom: And foreign currency movements.
Jana T. Croom: The actual effective tax rate skewed higher by the impact of the impairment and restructuring charges was approximately 52% in the third quarter of fiscal 2024.
Jana T. Croom: We continue to expect a consolidated tax rate in the mid twenties.
Jana T. Croom: Adjusted net income in the third quarter of fiscal 2024 was $8.4 million, or $0.34 per diluted share, compared to adjusted net income in Q3 last year of $16.4 million, or $0.65 per diluted share. Turning now to the balance sheet. Cash and cash equivalents at March 31, 2024 were $65.2 million, and cash flow from operating activities in the quarter was $42.6 million. Cash conversion days were 110 days compared to 92 days in the third quarter of last year and 117 days in Q2.
Jana T. Croom: Adjusted net income in the third quarter of fiscal 2024 was $8 4 million or 34 cents per diluted share compared to adjusted net income in Q3 last year, a $16 $4 million or 65 cents per diluted share.
Jana T. Croom: Turning now to the balance sheet.
Jana T. Croom: Cash and cash equivalents at March 31, 2024 were $65 $2 million in cash flow from operating activities in the quarter was $42 $6 million.
Jana T. Croom: Cash conversion days were 110 days compared to 92 days in the third quarter of last year and 117 days in Q2.
Jana T. Croom: The decrease in CCD this quarter compared to Q2 was driven by overall better management of working capital, with the biggest improvement occurring in production day sales on hand. We are looking to continue to significantly improve our cash conversion days as we actively and aggressively manage its components. Inventory ended the quarter at $396.2 million, compared to $488.2 million at the end of Q3 of fiscal 2023 and $455.7 million last quarter. We are very pleased with the reduction in inventory and expect this number to continue to decline as we work with customers to right-size inventory to match the current demand outlook.
Jana T. Croom: The decrease in CCD this quarter compared to Q2 was driven by overall better management of working capital, but the biggest improvement occurring in production days sales on hand.
Jana T. Croom: We are looking to continue to significantly improve our cash conversion days as we actively and aggressively manage its components.
Jana T. Croom: Inventory ended the quarter at $396 $2 million compared to $488 $2 million at the end of Q3 of fiscal 2023, and $455 $7 million last quarter.
Jana T. Croom: We are very pleased with the reduction in inventory and expect this number to continue to decline as we work with customers to rightsize inventory to match the current demand outlook.
Jana T. Croom: Capital expenditures in the third quarter were $13.4 million, a balance of supporting future growth, maintenance requirements, and investments in automation and efficiency. Borrowings on our credit facility at March 31, 2024 were $319.6 million compared to $289.4 million a year ago and $321.8 million at the end of Q2. Our short-term liquidity available, represented as cash and cash equivalents, plus the unused portion of our credit facilities, totaled $182.6 million at the end of the third quarter. There were no share repurchases in the third quarter of fiscal 2024.
Jana T. Croom: Capital expenditures in the third quarter were $13 $4 million of balances supporting future growth maintenance requirements and investments in automation and efficiency.
Jana T. Croom: Borrowings on our credit facility at March 31, 2024, or $319 $6 million compared to $289 $4 million, a year ago and $321 $8 million at the end of Q2.
Jana T. Croom: Our short term liquidity available represented as cash and cash equivalents plus the unused unused portion of our credit facilities totaled $182 $6 million at the end of the third quarter.
Jana T. Croom: There were no share repurchases in the third quarter of fiscal 2024.
Jana T. Croom: Since October 2015, under our board-approved Authorized Share Repurchase Program, a total of $88.8 million has been returned to our shareholders by purchasing 5.8 million shares of common stock. We have $11.2 million remaining in the repurchase program, and as Rick highlighted, we expect to return cash to shareholders with opportunistic share repurchases in the quarters to come. We are reiterating guidance for Adjusted Operating Income of 4.2 to 4.6% of net sales. In response to the current environment, net sales are expected to decline to 4.6% and to decline 4-6% compared to the prior year.
Jana T. Croom: October 20th 15th under our board approved authorized share repurchase program, a total of $88 $8 million has been returned to our shareholders by purchasing five $8 million 8 million shares of common stock.
Jana T. Croom: We have $11 $2 million remaining on the repurchase program.
Jana T. Croom: And as Rick highlighted we expect to return cash to shareholders with opportunistic share repurchases in the quarters to come.
Jana T. Croom: We are reiterating guidance for adjusted operating income of $4 two to four 6% of net sales in response to the current environment net sales are expected to decline to four two.
Jana T. Croom: <unk> declined four 6% compared to prior year.
Jana T. Croom: Our estimate for capital expenditures has been updated, with an expected outcome in the range of $55 to $60 million compared to our prior guidance of $70 to $80 million. As Rick previously stated, we anticipate macro headwinds to persist in fiscal 2025 based on early indications from customers. As a result, we expect to continue executing our efforts to streamline the company with additional anticipated pre-tax restructuring charges of $1 to $2 million. We will provide a more fulsome update next quarter when we provide FY25 guidance. I'll now turn the call back over to Rick.
Jana T. Croom: Our estimate for capital expenditures has been updated.
Jana T. Croom: With an expected outcome in the range of $55 million to $60 million compared to our prior guidance of $70 million to $80 million.
Jana T. Croom: As previously stated we anticipate macro headwinds to persist in fiscal 2025 based on early indications from customers.
Rick: As a result, we expect to continue executing our effort to streamline the company with additional anticipated pre tax restructuring charges of $1 million to $2 million.
Rick: We will provide a more fulsome update next quarter, when we provide FY 'twenty five guidance.
Jana T. Croom: I'll now turn the call back over to Rick.
Rick: Thanks Jana.
Richard D. Phillips: Before opening the lines for questions, I'd like to share a few thoughts in closing. We recently published our annual ESG disclosures with the release of our 2023 Guiding Principles Report, themed How We Are Winning Together with Kimball Way. The report reflects the deep roots of sustainability in our culture and highlights numerous sustainability-related recognitions and accomplishments for calendar 2020. I'd like to thank our team for once again putting together a best-in-class summary that captures the focus, effort, and achievements from the company in terms of sustainability.
Rick: Before opening the lines for questions I'd like to share a few thoughts in closing.
Richard D. Phillips: We recently published our annual ESG disclosures with the release of our 2023 guiding principles report themed how we are winning together Kimball way through.
Richard D. Phillips: Report reflects the deep roots of sustainability in our culture and highlights numerous sustainability related recognitions and accomplishments from calendar 2023.
Richard D. Phillips: I'd like to thank our team for once again, putting together a best in class summary that captures the focused effort and achievements from the company towards sustainability.
Richard D. Phillips: I believe the 2023 report is our finest and demonstrates our dedication to the guiding principles of customers, people, citizenship, and profit. For those of you that have not had the opportunity to review the report, it can be found on our corporate website. I am confident you will be thoroughly impressed.
Richard D. Phillips: I believe that 2023 report is our finest and demonstrates our dedication to the guiding principles of customers people citizenship and profits.
Richard D. Phillips: For those of you that have not had the opportunity to review the report it can be found on our corporate website I am confident you will be thoroughly impressed.
Richard D. Phillips: During this time of short-term market choppiness and uncertainty as to when consumer demand will return to normalized cycles, the actions announced today further position the company for long-term value creation. We continue to work to stabilize and improve our operating income. The divestiture of the AT&M business will increase our focus on EMS operations, while consolidating the EMS and medical solutions manufacturing organizations solidifies our medical plan, particularly as we look to extend our reach into higher levels.
Richard D. Phillips: During this time of short term market choppiness and uncertainty as to when consumer demand will return to normalized cycles. The actions announced today further position the company for long term value creation, we continue to work to stabilize and improve our operating income margin.
Richard D. Phillips: The divestiture of the ATM business will increase our focus on e-commerce operations, while consolidating the EMS and medical solutions manufacturing organizations solidifies, our medical platforms, particularly as we look to extend our reach into higher level assemblies.
Richard D. Phillips: In addition, we are improving our shared services organization through a lens of centers of excellence with new processes that leverage recent investments in technology.
Richard D. Phillips: In addition, we are improving our shared services organization through the lens of centers of excellence and new processes that leverage recent investments in technology. All of these actions have made the company leaner, more nimble, and with a cost structure that aligns with the current market conditions but not at the expense of future growth. We won't cross that line. As future growth materializes, we intend to hold these savings, enhancing our competitiveness and improving returns on sales. As I mentioned earlier, I've never been more excited about the future of the company. Carla, we would now like to open the lines for questions.
Carla: Thank you. If you'd like to ask a question, please press star followed by 1 on your telephone keypad. If you change your mind, please press star followed by 2. Our first question comes from Griffin Boss from B. Reilly Securities. Your line is now open.
Griffin Taylor Boss: Hi, good morning. Thanks for taking my questions.
Richard D. Phillips: So, first, I'll just start out broadly. In the first quarter, you mentioned your expectations that macro would remain challenging for some time, right? Obviously, now you're being a little more direct and saying it might persist through fiscal year 2025. I'm just curious if that's maybe longer than you thought last quarter, or what has changed. Are you seeing any incremental weakness in certain end markets? Just a little bit more color there would be helpful.
Richard D. Phillips: Yeah, Griffin. Hi, how are you? Thanks for joining the call. You know, I would say Griffin, we've tried not to be too precise in predicting the return to normal levels of demand stability just because there is so much uncertainty and so many factors. We obviously stay very close to our customers and their demand signals and work with them on what they're seeing and expecting. And I would say, you know, while we haven't predicted this return to stability, it has persisted for probably longer than we anticipated.
Richard D. Phillips: And those are the signals we continue to see. Again, we're having a lot of success in building our funnel, in winning new programs, in delivering on operations and quality performance. And so we continue to have that really optimistic long-term view. But to your point, this softness has been persisting. And that's why we updated our perspective on fiscal year 2021. Yeah, Griffin.
Jana T. Croom: Yeah, Griffin, what I will add is... If you had talked to us nine months ago, we would have said it's going to be a short-lived decline and it's not the funnel of new business. It's really the volume decline in some of our existing business that is challenging revenue right now. And we're seeing it everywhere around the globe, and so it's interesting because this quarter we saw all verticals and all geographic regions impacted. So beyond Europe, which is where we saw it begin, into North America and Asia.
Jana T. Croom: Got it. Okay, that's helpful. So has anything changed? I guess I'll just hone in on, maybe, North American steering and braking.
Jana T. Croom: Obviously, that's been an area of strength in the past couple of quarters. Has that trend changed at all? Or what are you seeing in that market?
Jana T. Croom: So we are seeing softening. And in the North America market, we're seeing softening in the Asian market related to the steering and braking business. And I think it's just the result of a couple of things. One, inventory levels, as we're the tier two supplier, and the tier ones are sitting on a fair amount of inventory. But that's also a reflection of consumer demand, and so I think everyone's sort of taking a bit of a wait and see approach, given the geopolitical environment.
Jana T. Croom: You couple that with some things that EV and hybrid automakers have to work through in terms of improving battery life, which is something they've been talking about and we've been seeing. And here we are. But we do expect it to persist through fiscal 2025.
Griffin Taylor Boss: Okay, understood. Got it. Thanks, Jana. And then, just switching over to the automation test and measurement divestiture, can you give any more sense of the size of that business or scale as it relates to revenue or its contribution to the company?
Jana T. Croom: Yeah, so actually, Griffin, if you look at our press release, we tried to give it to you so you wouldn't have to guess. We're not giving you complete information right now because the sale is in progress. But once the sale is consummated, we will give you more fulsome information. What we disclosed in the press release was net sales and operating income for the three months and the nine months. And then, of course, as we proceed through FY25, we'll give you all of that information as well to help you get there.
Jana T. Croom: Income.
Jana T. Croom: For the three months and the nine months and then of course as we proceed through growth maintenance Capex, what's what's the change you expect you know in the model a post divestiture here.
Griffin Taylor Boss: Okay, great. All right. Thanks for that, Jana.
Jana T. Croom: So maybe we'll just start there.
Griffin Taylor Boss: I was going to give you the numbers, but if... Yeah, well, hey, I mean, okay. All right, I'll check back through the press release. Appreciate it.
Speaker Change: Yeah. Good morning, Derek and thank you for the question so I'll start with Capex, because that's probably the easiest.
Speaker Change: On this particular business was not.
Griffin Taylor Boss: Significantly capital intensive and so you will see some decline in capex, but it's it's not gonna be meaningful the capex that you're going to see from us going forward is going to be more a function of.
Derek John Soderberg: Our next question comes from Derek Soderberg from Country Fitzgerald. Your line is now open.
Derek John Soderberg: Yeah, good morning, everyone. Thanks for taking the questions.
Derek John Soderberg: Right sizing and the need to continue to invest in the business for future growth against the current economic environment and so look for FY 'twenty five to be similar in nature to FY 'twenty four is what I would tell you to model.
Derek John Soderberg: Just back to the divestiture here. Can you quantify all the cost savings you expect on an annual basis? You know, what sort of change to OPEX do you expect? You know, growth, maintenance, CapEx? What's the change you expect in the model post divestiture here? So maybe we'll just start there.
Derek John Soderberg: In terms of additional opportunities for cost savings.
Derek John Soderberg: The focus is going to be on right sizing the company for the current demand.
Jana T. Croom: Yeah, good morning, Derek. And thank you for the question. So I'll start with capex because that's probably the easiest. This particular business was not significantly capital intensive. And so you will see some decline in CapEx, but it's not gonna be meaningful. The CapEx that you're gonna see from us going forward is gonna be more a function of right sizing the need to continue to invest in the business for future growth against the current economic environment.
Jana T. Croom: Considering the future growth that we've got.
Speaker Change: And I'm just going to go ahead and say it at some point Derek we are you know our goal of adjusted operating income margin and the five to five and a half range needs to stop being a goal and something we actually deliver.
Jana T. Croom: And so look for FY 25 to be similar in nature to FY 24, is what I would tell you to model, in terms of additional opportunities for cost savings. The focus is going to be on right-sizing the company for the current demand, considering the future growth that we've got. And I'm just going to go ahead and say it. At some point, Derek, our goal of adjusted operating income margin and the 5 to 5 and 1 12 range needs to stop being a goal and something we actually deliver. And so with that in mind, we are going to be looking to streamline the company to deliver.
Jana T. Croom: And so with that in mind, we are gonna be looking to streamline the company and.
Jana T. Croom: To deliver those results.
Speaker Change: Got it.
Jana T. Croom: Hum.
Speaker Change: Yeah go.
Speaker Change: Go ahead.
Speaker Change: Yeah sure.
Speaker Change: Well really appreciate it.
Speaker Change: Some color there I wanted to move onto automotive I'm curious you know what might be the next big I guess breaking win for you guys can you talk about the pipeline specifically for advanced braking, what's the interest level. There you know us.
Speaker Change: The interest more North America, or China can you just talk about that pipeline.
Jana T. Croom: Yeah.
Jana T. Croom: So that we are going to tell you at Q4, we just need to get permission to disclose it.
Jana T. Croom: Already have the next breaking win and it's.
Speaker Change: I'm actually going to be in Europe, and it's going to be up and running and FY 'twenty five.
Jana T. Croom: Got it. Well, I appreciate it, Jana. There's always curtains on my site, and I have them, yeah. Yeah, sure. Well, I really, really appreciate some color there.
Speaker Change: So if you recall a while back we said that eventually we would have braking and every region of the world and that is still absolutely the expectation and well underway.
Derek John Soderberg: I wanted to move on to the automotive industry. Curious, you know, when might we see the next big, I guess, braking win for you guys? Can you talk about the pipeline specifically for advanced braking? What's the interest level there? You know, is the interest more in North America or China? Can you just talk about that pipeline?
Speaker Change: I just I don't have to got it means all the details right now.
Derek John Soderberg: For Q Q4, I will.
Derek John Soderberg: Got it that's good to hear and then just in terms of use of capital here.
Derek John Soderberg: You guys called out share repurchases.
Derek John Soderberg: Whats changed in terms of the priority on that do you think shares here at 'twenty, one or opportunistic.
Jana T. Croom: So we are going to tell you at Q4, we just need to get permission to disclose it. We already have the next breaking wind. And it's actually going to be in Europe, and it's going to be up and running in FY25. So if you recall a while back, we said that eventually we would have broadband in every region of the world. And that's what we did. That is still absolutely the expectation, and well underway. I just, I don't have time to give you all the details right now, but for Q4, I will.
Jana T. Croom: And then on M&A. It seems to me like maybe the focus has shifted a little bit more towards organic growth and away from M&A.
Derek John Soderberg: Got it. Well, it's good to hear from you.
Speaker Change: Yes. Thanks.
Speaker Change: Those are great questions. So yes, absolutely part of the reason that we had suspended share repurchase quite honestly was we're trying to get our balance sheet out of state where it was healthier considering you know net debt to EBITDA levels inventory levels debt levels.
Derek John Soderberg: Cash et cetera, where we sit now with that debt and also looking at where our stock prices.
Derek John Soderberg: And then Jana, just in terms of the use of capital here. You know, you guys called out share repurchases. What's changed in terms of the priority on that? You know, do you think shares here at 21 are opportunistic? And then on M&A, it seems to me like maybe the focus has shifted a little bit more towards organic growth and away from M&A. Is that the case? Yeah, thanks. Those are great questions. So
Speaker Change: Yes, I consider the stock price in absolute value here, but also candidly.
Jana: We as Kimball arent buying our stock why should we be convincing anybody else to buy our stock and so we are going to be in the market.
Speaker Change: Repurchasing our shares.
Jana: In terms of you know the way that we think about the future of Kimball.
Jana: Pipeline is really robust.
Jana: And quite honestly from just a risk reward perspective, you would always acquire Morris Campbell because that is what you know and that's what you know you can do well.
Jana T. Croom: Those are great questions. So, yes, absolutely. Part of the reason that we had suspended share repurchase, quite honestly, was that we were trying to get our balance sheet out of the state where it was healthier, considering, you know, net debt to EBITDA levels, inventory levels, debt levels, cash, etc., where we sit now with net debt and also looking at where our stock price is. We as Kimball aren't buying our stock; why should we be convincing anybody else to buy our stock?
Jana T. Croom: That is not to say that we would not be interested in pursuing inorganic opportunities. There are some really interesting things out there, but as we've said previously it would be in the health care space.
Jana T. Croom: Cause we were not looking for.
Jana T. Croom: Increased exposure in and autos or necessarily industrial we've got really great funnels. There it would be in a geographic region that we don't currently serve that was gonna add you know something to our complement or it would be us buying.
Jana T. Croom: And so we are going to be in the market, repurchasing our shares. In terms of, you know, the way that we think about the future of Kimball. The pipeline is really robust, and quite honestly, from just a risk-reward perspective, you would always acquire more Kimball because that is what you know, and that's what you know you can do well. That is not to say that we would not be interested in pursuing inorganic opportunities.
Jana T. Croom: The facility that we don't already have candidly, though our favorite acquisitions to make or when one of our customers says hey, I don't want to produce this book of business anymore. Kimball will you take this over for us.
Jana T. Croom: And.
Jana T. Croom: Again, that's something that we know that we can do well and so I would expect if we were to announce something it would be in that vein.
Jana T. Croom: There are some really interesting things out there. But, as we've said previously, it would be in the healthcare space because we were not looking for increased exposure in autos or, necessarily, industrial. We've got really great funnels there. It would be in a geographic region that we don't currently serve that would add something to our complement, or it would be us buying a capability that we don't already have. Candidly, though, our favorite acquisitions to make are when one of our customers says, hey, I don't want to produce this book of business anymore. Kimball, will you take this over for us? Again, that's something that we know that we can do well, and so I would expect if we were to announce something, it would be in that vein.
Jana T. Croom: Yeah.
Jana T. Croom: Yeah.
Speaker Change: Got it I appreciate it John.
Jana T. Croom: As a reminder to ask a question. Please press star followed by one on your telephone keypad.
Jana T. Croom: Our next question comes from Jason Schmidt Schmidt Lake Street.
Speaker Change: Hey, guys. Thanks for taking my questions just a couple on the test <unk> measurement business, how much of the updated outlook is being driven by the sale versus just broader softness.
Jana T. Croom: Okay.
Jana T. Croom: Yeah, that's a great question, so as we look at our industrial.
Jana T. Croom: Segment, which is where a T N M live this quarter for example, if I look at the decline in industrial roughly half of it was from a T N M and remember it's not disc ops that that's truly the decline year over year that we saw in revenue and the ATM business. So hopefully that that gets you.
Carla: As a reminder, to ask a question, please press star followed by 1 on your telephone keypad. Our next question comes from Jason Schmidt from Lake Street.
Jana T. Croom: Some color there.
Jason Schmidt: But we are selling.
Carla: If I had to chunk it up you and Big Pictures I would say you've got the F. D. A recall from a single customer.
Jason Schmidt: The softness in the industrial half of it is the a T N N business and then you've got some bright spots and medical that are offsetting some softness that we're seeing in automotive.
Jason Schmidt: Hey guys, thanks for taking my questions. Just a couple on the test measurement business. How much of the updated outlook is being driven by the sale versus just broader softness?
Jason Schmidt: Yeah.
Jason Schmidt: Yeah, that's a great question. So if we look at our industrial segment, which is where AT&M lives, this quarter, for example, if I look at the decline in industrial, roughly half of it was from AT&M. And remember, it's not a discount.
Jason Schmidt: Okay. That's really helpful. And then Rick just curious how much of this.
Speaker Change: Decision is driven by when you first came in and looked at the broader book of business and as you noted the test <unk> measurement business isn't terribly synergistic or how much of this is being driven by just a response to overall market conditions in the broader business.
Jana T. Croom: That's, that's truly the decline year over year that we saw in revenue in the AT&M business. So hopefully, that gives you some color there. But we are, so if I had to chunk it out for you in big pictures, I would say you've got the FDA recall from a single customer, the softness and the industrial, half of it is the AT&M business, and then you've got some bright spots in medical that are offsetting some softness that we're seeing in automotive.
Jana T. Croom: Very much the former Jason I think we.
Jana T. Croom: As I.
Jana T. Croom: Got into the business and together with the leadership team really spent a lot of time conducting a strategic review.
Jana T. Croom: I saw that the strategic fit really wasn't there and that I think the ATM business will be served better by a different owner and will also allow kimball to really focus on what we think is a really bright long term future.
Richard D. Phillips: Okay, that's really helpful. And then Rick, just curious how much of this decision is driven by when you first came in and looked at the broader book of business, and as you noted, the test and measurement business isn't terribly synergistic, or how much of this is being driven by just a response to overall market conditions in the broader business.
Jana T. Croom: Mass, including our medical solutions.
Rick: Capabilities that we have so very very much strategic as opposed to current market conditions.
Rick: Got it and then just the last one for me and I'll jump back into queue. Janet you noted inventory work down quite a bit in the quarter would we expect it to continue to decline this calendar year.
Richard D. Phillips: Very much the former, Jason. I think we, you know, as I got into the business and together with the leadership team really spent a lot of time conducting a strategic review, I saw that the strategic fit really wasn't there and that I think the AT&M business would be served better by a different owner and would also allow Kimball to really focus on what we think is a really bright long-term future in EMS, including our medical solutions and the capabilities that we have. So it is very, very much strategic as opposed to the current market.
Rick: Yes, and in fact, we're expecting it to continue to decline this fiscal year.
Richard D. Phillips: It's a combination of two things what we saw was.
Richard D. Phillips: Everyone wanted excess inventory on hand, because they wanted to feel comfortable coming out of the supply chain shortages that we saw in COVID-19.
Richard D. Phillips: And then everyone realized they had too much inventory and customer demand for us as a tier two supplier started to drop off and so we had to right size the amount of inventory that we had to the current demand and so as we work through the remainder of the calendar year and even yet this quarter, we're actively working with cut.
Jason Schmidt: I got it. And then just the last one for me, and I'll jump back into queue. Jana, you noted inventory worked down quite a bit in the quarter. Would we expect it to continue to decline this calendar year?
Richard D. Phillips: <unk> to right size the inventory cancel what we can push out what we can in and really get the inventory right sized for the revenue that we're going to produce.
Jana T. Croom: Yes, and in fact, we're expecting it to continue to decline this fiscal year. It's a combination of two things. What we saw was that everyone wanted excess inventory on hand because they wanted to feel comfortable coming out of the supply chain shortages that we saw in COVID. But then everyone realized they had too much inventory, and the customer demand for us as the Tier 2 supplier started to drop off, and so we had to right-size the amount of inventory that we had to the current demand.
Speaker Change: Okay that makes sense. Thanks, a lot guys.
Speaker Change: Thank you Jason.
Jana T. Croom: And our next question is from Tim Morris from <unk> Hudson.
Speaker Change: Your line is now open.
Speaker Change: Thanks, Rick and Jana It was yes.
Jana T. Croom: Nice to see the working capital recovery benefit seemed like free cash flow was about 29 million in the quarter. So that was great I'm glad you.
Speaker Change: So calling that back to you and I actually had a question you lowered your capex guidance by $15 million to $20 million. This year Julian not that much tied to the divestiture. How should we think about next year would kind of that 15 to 20 million Capex cut rollover and be catch up next year, you know, you're thinking maybe $70 million to $80 million Capex for next year.
Jana T. Croom: And so, as we work through the remainder of the calendar year and even this quarter, we're actively working with customers to right-size the inventory, cancel what we can, push out what we can, and really get the inventory right-sized for the revenue that we're going to produce.
Jana T. Croom: No.
Speaker Change: You're very clear about that.
Jana T. Croom: You know, it's not uncommon to have a company to take a little bit of a what I'll refer to as a capex diet as you're looking at the the outlook that we're looking at and so think of it frame. It. This way you know that depreciation is is roughly $38 million to $40 million it.
Jason Schmidt: Okay, that makes sense. Thanks a lot, guys.
Timothy M. Moore: Thank you, Jason. And our next question is from Tim Moore from EF Hutton. Your line is now open.
Timothy M. Moore: Thanks, Rick and Jana. It was, you know, nice to see the working capital recovery benefit. I mean, it seemed like pre-CASLA was about $29 million in the quarter, so that was great. I'm glad you're still clawing that back. Jana, I actually had a question.
Timothy M. Moore: It's very important that companies keep their maintenance Capex program in place because if you get off of maintenance Capex program, just all sorts of of challenging things happen downstream and so we won't do that.
Timothy M. Moore: You know, you lowered your CAPEX guidance by $15 to $20 million this year. There's really not that much tied to the divestiture. And how should we think about next year? Would kind of that $15 to $20 million CAPEX cut rollover and be catch-up next year? You know, are you thinking maybe $70 to $80 million in CAPEX for next year?
Timothy M. Moore: And then the balance of it is going to be.
Timothy M. Moore: What I'll refer to as aggressively timed growth.
Timothy M. Moore: As you all know the lead time for or new programs to get up and running particularly automotive can be 12 to 18 months and so what we're really aggressively managing is the timing that we have to spend that capital to get that S. N T line up and running P popped cleared.
Jana T. Croom: No. Let me be very clear about that. You know, it's not uncommon to have a company take a little bit of what I'll refer to as a CapEx diet as you're looking at the outlook that we're looking at. And so think of it this way.
Jana T. Croom: Certified <unk>.
Jana T. Croom: Earning the dollar of revenue.
Jana T. Croom: And so we are going to keep that absolutely as tight as possible not sacrificing future growth and getting programs up and running on time, but just being very very mindful of the waves are that we are spending our cash.
Jana T. Croom: You know that depreciation is roughly $38 to $40 million. It is very important that companies keep their maintenance CapEx program in place because if you get off a maintenance CapEx program, all sorts of challenging things happen downstream, and so we won't do that. And then the balance of it is going to be what I'll refer to as aggressively timed growth. As you all know, the lead time for our new programs to get up and running, particularly for automotive, can be 12 to 18 months.
Speaker Change: Great that makes sense, especially considering how much you guys spent on.
Jana T. Croom: Expansion capex the prior two years, but of course, they're actually for for Rick you know I know.
Jana T. Croom: I know you've been talking about you know the incoming.
Jana T. Croom: Opportunities for medical.
Jana T. Croom: In sourcing decisions and taking some processes in house from some major.
Jana T. Croom: Customers or potential customers so.
Jana T. Croom: And so what we're really aggressively managing is the timing that we have to spend that capital to get that SMT line up and running, PPAP cleared, and certified, versus earning the dollar of revenue. And so we are going to keep that absolutely as tight as possible, not sacrificing future growth and getting programs up and running on time, but just being very, very mindful of the ways that we are spending our time.
Speaker Change: So it seems like that's been under consideration for maybe the last 12 months have you have you signed off on any of them or a green with any of them.
Jana T. Croom: Well, we have a we're not yet able to comment specifically on that but we've had some good success there and again.
Jana T. Croom: We're really pleased that everyone knows about the the FDA recall situation and the significant impact in the year.
Jana T. Croom: To us and again to be clear on that we've not.
Jana T. Croom: I assumed that business returning in any of our future forecast, we stand ready to support it. So that has had a significant impact, but we've had significant wins elsewhere that have already begun to offset that as you know and there are more coming and there's one very significant one that fits right into the category that you just described it we will be talking.
Timothy M. Moore: Great. That makes sense, especially considering how much you guys spent on expansion CapEx the prior two years. But I actually have a question for Rick.
Richard D. Phillips: You know, I know you've been talking about, you know, the incoming opportunities for medical, you know, insourcing decisions and taking some processes in-house from some major customers and potential customers. So it seems like that's been under consideration for maybe the last 12 months. Have you signed off on any of them or greenlit any of them?
Speaker Change: More about that very soon.
Richard D. Phillips: Good good because it means it seems like that pipeline. So big that you could eventually backfill in that consent decree customer issue.
Richard D. Phillips: Not immediately but over the next few quarters.
Richard D. Phillips: Well, we have, we're not yet able to comment specifically on that, but we've had some good success there. And, again, we're really pleased that everyone knows about the FDA recall situation, the significant impact it had on us this year. And again, to be clear on that, we have not assumed that business will return in any of our future forecasts; we stand ready to support it. So that's had a significant impact.
Richard D. Phillips: One last question maybe for Xena on gross margin.
Richard D. Phillips: Came in a bit late in the quarter.
Richard D. Phillips: I know you only have one quarter left in the fiscal year.
Richard D. Phillips: We should be looking out for the next fiscal year.
Richard D. Phillips: The good set up for next year, but.
Richard D. Phillips: Is the E 483% gross margin possible in the June quarter, if you exclude the.
Richard D. Phillips: The discontinued automation test and measurement, which seems to be losing 8 million operating income a quarter. When you strip that out as a discontinued item.
Richard D. Phillips: But we've had significant wins elsewhere that have already begun to offset that, as you know, and there are more coming. And there's one very significant one that fits right into the category that you just described. We'll be talking more about that very soon.
Richard D. Phillips: Yes.
Richard D. Phillips: Okay.
Richard D. Phillips: So our goal.
Richard D. Phillips: Yeah.
Richard D. Phillips: You know if you just do the rough math around getting to 5% you need gross margin sort of in that eight and a half per cent range SG&A in the three and a half per cent range, but I will tell you is we're still right sizing the business and examining the revenue.
Timothy M. Moore: Good, good. It just seems like that pipeline is so big that you could eventually backfill that consent decree customer issue, not immediately, but over the next few quarters. One last question, maybe for Jana, on gross margin. It came in a bit light in the quarter. I know you only have one quarter left in the fiscal year, and investors should be looking out for the next fiscal year, but is an 8.4, 8.3% growth margin possible in the June quarter if you exclude the discontinued automation test measurement, which seems to be losing $8 million operating income a quarter when you strip that out as a discontinued item?
Jana: So I don't know that we quite get there in Q4, but certainly that's the goal for us.
Timothy M. Moore: FY 'twenty five.
Jana: But we're going to have close to be in our our adjusted <unk> guidance range for for O. I margin. So you can sort of back end math of where we might be in Q4.
Jana: No that's fine that's fine it's nice I guess.
Speaker Change: This is a big operating loss of.
Jana: $30 million a year run rate, but it's great that you are getting rid of that doing the proper ROI.
Jana T. Croom: So our goal. You know, if you just do the rough math around getting to 5%, you need gross margin sort of in that 8.5% range, and SG&A in the 3.5% range. What I will tell you is we're still right-sizing the business and examining revenue. So I don't know that we'll quite get there in Q4, but certainly that's the goal for FY25. But we're going to have to be close to be in our adjusted OI guidance range for OI margins. So you can sort of back into the math of where we might be in Q4.
Jana: So thanks, a lot I appreciate it yeah, so the ones.
Speaker Change: Yeah, Tim I, just wanted to call out, though the loss in the quarter includes all of the restructuring and impairment. So when youre looking at G. S business, you're going to have to strip that out to get to the right.
Jana T. Croom: So that was $22 million. So maybe it's more like an $8 million a year or something like that ex goodwill impairment and the asset.
Jana T. Croom: And stuff.
Speaker Change: Okay, well thank you.
Speaker Change: Thanks, Tim we currently have we currently have no further questions and I kindly remind you that a replay of the call will be available on the Investor Relations page of the Kimball electronics website.
Timothy M. Moore: No, that's fine. That's fine. And it's nice. I guess it's not nice. This was a big operating loss of, you know, I don't know, $30 million a year at run rate.
Speaker Change: This concludes today's conference call have a nice day you may now disconnect your lines.
Timothy M. Moore: But it's great that you're getting rid of that and doing the proper ROI. So, thanks a lot. I appreciate it.
Timothy M. Moore: Yeah.
Timothy M. Moore: [music].
Jana T. Croom: Yeah, so the one, yeah, Tim, I just want to call out though, the loss in the quarter includes all of the restructuring and impairment. So when you're looking at GES's business, you're going to have to strip that out to get to the right number.
Jana T. Croom: Yeah, so that was 22 million, and so maybe it's more like an 8 million a year or something like that X goodwill impairment in the Okay, well, thank you.
Carla: We currently have no further questions, and I kindly remind you that a replay of the call will be available on the Investors Relations page of the Kimball Electronics website. And this concludes today's conference call. Have a nice day. You may now disconnect your line.