This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Good morning, ladies and gentlemen, and welcome to the Kimball Electronics Fourth Quarter Fiscal 2021 Earnings Conference Call. My name is Adrienne, and I will be your facilitator for today's call. All lines have been placed on a listen-only mode to prevent any background noise. After this completion of the prepared remarks from the Kimball Electronic Leadership Team, there will be a question and answer period. To ask a question, simply press star and then the number one on your telephone keypad. Questions will be taken in the order they are received. Today's call, August 5th, 2021, is being recorded. A replay of the call will be available on the Investor Relations page of the Kimball Electronic website. At this time, I would now like to turn the call over to Andy Ruggert, Head of Investor Relations. Mr. Ruggert, you may begin.
spk03: Thank you, operator, and good morning, everyone. Welcome to our fourth quarter conference call. With me here today is Don Sharon, our chairman and CEO, and Jana Kroon, vice president, chief financial officer. We issued a press release yesterday afternoon with the results of our fourth quarter and full fiscal year ended June 30th, 2021. To accompany today's call, a presentation has been posted to the investor relations page on our company website, within the Events and Presentations tab. Before we get started, I would like to remind you that on today's call 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 forward-looking statements. All commentary today is focused on adjusted, non-GAAP results. For the fourth quarter of fiscal 2021, This excludes a one-time after-tax expense totaling $0.3 million or one cent per diluted chair associated with non-operating items. Reconciliations of GAAP to non-GAAP amounts are available in our press release. This morning, Don will start the call with a few opening comments. Jana will review the financial results for the quarter and the full year fiscal 2021 and guidance for fiscal 2022. And Don will complete our prepared remarks before taking your questions. I'll now turn the call over to Don.
spk05: Thanks, Andy, and good morning, everyone. I'm very pleased with our operating results for the fourth quarter and the strong finish to a record-setting fiscal year 2021. Our team remains laser-focused on fulfilling the commitments made to our customers as we work through the ongoing challenges caused by the pandemic and the global park shortage. Despite the headwinds, we delivered strong top-line growth, excellent margin expansion, and impressive earnings growth with operating income exceeding our goal of 4.5% for the fourth consecutive quarter and adjusted Q4 EPS increasing 71% over the same period last year. For the full fiscal year, 2021 was a record year for our company with many financial metrics, including net sales, margin rates, earnings, cash flow from operating activities, and return on invested capital reaching all-time highs. Our team has demonstrated remarkable resilience throughout these unprecedented times, and we are well-positioned to carry the momentum from 2021 into fiscal year 2022. As a result of the ongoing semiconductor shortage, a portion of our shippable backlog continues to shift out ahead of us. which will likely result in two very different halves in fiscal year 2022. Our full year guidance, which Jana will discuss in a few moments, contemplates this bifurcation as we expect the material supply to steadily catch up with customer demand throughout the first half of fiscal year 2022, thus enabling us to shift the majority of the surplus backlog in the second half of the fiscal year and into fiscal year 2023. We expect that catching up on the backlog combined with strong organic growth from new and existing programs will provide significant year-over-year growth. Beyond the record-setting results for fiscal year 2021 and the bullish outlook for fiscal year 2022, we have never lost sight of the fact that the health and safety of our employees remains our number one priority. Our protocols are minimize disruptions to the business, and allowed us to maintain excellent customer support as reflected in our top line growth during this period of uncertainty. Net sales in Q4 increased 15% compared to the same period last year. This was a stronger finish to fiscal year 2021 than what we discussed 90 days ago on our last earnings call. The growth was concentrated in our automotive and industrial vertical markets. Automotive was up 92% in Q4 as compared to a year ago as the industry returns to more normalized levels of volume after the shutdown a year ago due to the pandemic. The business continues to benefit from two industry-wide megatrends. First, the demand for vehicles is red hot as communities reopen from the pandemic and consumers, many who have cash in their pockets, leave their homes and take to the road to reengage with society. OEMs have been responding to this surge in demand by ramping up production to keep pace. At most degree, there is not a foreseeable end in sight. The second megatrend is the continued growth in electronic content per vehicle. Cars and trucks are being designed with advanced technologies and expanded operating systems. Advancements including electronic steering, automated driver assistance, passenger safety systems, vehicle mobility management, electronic braking, and redundant systems for self-driving cars. These are all good examples of this megatrend and represent continued growth opportunities for our business. Moreover, the applications and architecture for these systems are largely the same for both electric vehicles and vehicles driven by internal combustion engines. And the stringent production standards in the automotive industry for these systems align well with our core manufacturing competencies. Often making chemoelectronics, a supplier choice. There's an inherent stickiness in these long-term relationships when we win a program and it produces an ongoing stream of orders that allows for operating efficiency. You can see this dynamic in our customer base, which gives us confidence in the growth potential of this vertical market in the years to come. Sales in the industrial vertical increased 17% in the fourth quarter compared to the same period last year, with the strength resulting from automation tests and inspection sales and higher-end climate control products. We expect this strength to continue in fiscal year 2022. The medical vertical market was down 31% in Q4 as a result of strong prior year sales related to the COVID-19 pandemic. and lower levels of elective procedures this year. We are starting to see this trend reverse as more of the population is vaccinated, and physicians, offices, and hospitals are able to resume elective procedures and activities. Longer term, we believe the megatrends in the healthcare industry, such as the world's aging population, increasing access and affordability to care, decreasing device sizes, and connected drug delivery systems are an excellent setup for future growth. in this vertical market. And finally, sales and public safety were 10.8 million, down 10% from the prior year. This is yet another temporary impact of the COVID-19 pandemic, as the reduction in sales is primarily related to commercial and hotel smart locking systems. We anticipate this market will return to normal over time as people resume travel. I am so proud of our team and their efforts to deal with the challenges throughout the year. we have been working diligently to find solutions to minimize or even negate the global parts shortage. This is a great example of how our strong company culture is creating quality for life. I'll now turn the call over to Jana to discuss our results in more detail and lay out our guidance for fiscal year 2022. Jana?
spk01: Thanks, Don, and good morning, everyone. Net sales in the fourth quarter for $329.1 million, a 15% increase compared to $286.2 million in Q4 last year. Foreign exchange rates favorably impacted sales by 3% in the fourth quarter of 2021. Our gross margin rate in Q4 was 9.7%, a 240 basis point increase from the fourth quarter of last year. driven by improved operating execution, higher sales volumes in the automotive vertical, as Don highlighted, and favorable foreign exchange. Adjusted selling and administrative expenses were $13.8 million in the fourth quarter, up $3.7 million, or 0.7% of net sales compared to the fourth quarter last year. This increase was primarily driven by salary and payroll-related costs, and higher profit-sharing bonuses. As a reminder, adjusted selling and administrative expenses exclude changes and the fair value of our SERP liability, which is directly offset in other income and expense, from changes in the fair value of the SERP investment. Adjusted operating income for the fourth quarter was $18 million, or 5.5% of net sales. This represents an improvement of $7.2 million, or 1.7% of net sales, when compared to the same period last year. The increase was driven by the higher gross profit that I just mentioned, partially offset by the change in selling and administrative expenses. Other income and expense was income of $0.4 million in the fourth quarter, which compares to expense of $2.7 million in Q4 fiscal 2020. The income this year resulting from gains on SERP investments and favorable SX partially offset by net interest expense and all other expenses. The effective tax rate in Q4 was 17.6%. The low effective tax rate in Q4 was primarily driven by a favorable mix of earnings and our various tax jurisdictions. Adjusted net income in the fourth quarter of fiscal year 2021 was $14.7 million, or 58 cents per diluted share, compared to adjusted net income in Q4 last year of $8.5 million, or 34 cents per diluted share. As Don noted, this represents a 71% improvement in EPS year-over-year. Now, turning to the balance sheet. Cash and cash equivalents at June 30, 2021 were $106.4 million. Cash flow provided by operating activities during Q4 was $26.3 million, our fifth consecutive quarter of $20 million plus. Cash conversion days for the quarter into June 30, 2021 were 64 days. representing a 17-day improvement from Q4 2020 and a two-day improvement from last quarter. Compared to Q4 2020, we experienced improvement in contract asset days and production day supply on hand. Capital investments in the first quarter were $15.9 million, largely to support the launch and ramp-up of new programs and to support our facility expansions in Thailand and Mexico. We continue to study our capacity needs to support growth plans. As highlighted on our Q3 call, we anticipate higher levels of CapEx to support the extensions of our operations in Thailand and Mexico over the course of fiscal year 2022. Both expansions add much needed capacity to support the forecasted growth from both existing and future customers and demonstrate our strong organic growth opportunities. Borrowings on our credit facilities at June 30, 2021 were $66 million, which is down from $118 million a year ago. Our short-term liquidity available represented as cash and cash equivalents plus the unused amount of our credit facilities totaled $207 million at June 30, 2021. There were no shares repurchased in the fourth quarter of fiscal year 2021. Since October of 2015, under our board-authorized share repurchase program, a total of $79.7 million was returned to shareholders by purchasing 5.3 million shares of common stock. As Don highlighted, the full year fiscal 2021 was record-setting for our company, with a number of financial metrics achieving all-time highs. Net sales were $1.292 billion, an 8% increase over the prior year. Adjusted operating income was 5.2% of net sales, a 180 basis point improvement from fiscal 2020. Adjusted net income totaled $56.4 million compared to $28 million last year. And adjusted EPS was $2.23, more than double fiscal 2020. Included in the results this year was a favorable impact from foreign currency rate movement, which resides in other income and expense. Excluding this impact of 17 cents, the adjusted net result for fiscal 2021 of $2.06 was still well above the $1.10 we reported a year ago. We generated $130 million of cash from operating activities, and our return on invested capital reached 13.1%, best in our history. Now turning to fiscal 2022. For the first time in our company history, we are providing guidance for the full fiscal year. We estimate net sales will be in the range of $1.4 to $1.5 billion, an 8% to 16% increase over fiscal 2021. Operating income margin is expected to be 4.5 to 5% of net sales. And finally, we expect to invest $60 to $70 million in capital expenditures in the fiscal year. I'll now turn the call back over to Don.
spk05: Thanks, Jana. Before we open the line for questions, I'd like to take a moment to reiterate how proud I am of our team. We posted excellent operating results for the fourth quarter, despite meaningful headwinds, and finished our record year with strength. We are also well positioned to carry the momentum into fiscal year 2022 by guiding for growth. The company is in a solid position and we are committed to build success in the future. With that, I would like to open the lines for questions. Operator, do we have any analysts with questions in the queue?
spk00: As a reminder, if you would like to ask a question, press star 1. The first question comes from the line of Anna Sollstrom with Sudoti.
spk02: Hi, everyone. Can you hear me?
spk05: Yes, we can, Anya.
spk02: Thank you for taking my question, and congratulations on a strong quarter and year despite the challenging environment. Thank you. I just fell off the call. You talked about the auto industry, and then I assume you talked about the industrial use of strength in the GS and the climate controls there. Is that correct?
spk05: Yes, that's correct.
spk02: And then what do you see in terms of the smart metering over in Europe? I would assume that the climate control is driven by the COVID-19 The people going back to the offices and, and, and, um, hotel and everything opening up the listing over there, the controls. Uh, so that might be bring that elevation up, but as that maybe normalizes, then the smart metering in Europe is coming on board again, or how should we think about that? But the growth in, in an industrial.
spk05: Yeah. You know, the smart, the smart metering business in Europe is still being held back by the pandemic. And so it will require quite a bit of change yet in terms of the environment there in Europe and being able to have access for installation purposes of those smart meters. So we're anxiously watching that business and hoping for its return, but it's absolutely related to getting this pandemic behind us before we would see, let's say, pre-pandemic run rates The rest of our business in the industrial vertical remains healthy. Climate control in a number of areas remains healthy. And as you said, automation, test, and measurement, Q4 is their strongest quarter, and they had a strong quarter in Q4 this year. So we expect the industrial vertical to continue to be strong for us as we go forward.
spk02: Okay. And what do you see in terms of the medical electives there that's sort of muting the growth there? How is that trending throughout the quarter?
spk05: We're seeing signs of improvement and that the trend there is improving in terms of those products we build to support those elective procedures and surgeries. So we're optimistic that that trend will continue. Of course, you know, with the new Delta variant and the sort of concerns around that, we're hoping that what we've seen in the past quarter in terms of a positive trend doesn't get reversed here this quarter. But so far, so good. We're seeing a nice positive trend in terms of the return of that business. It's going to take some time, we believe, but it's definitely trending upwards.
spk02: Okay, thank you. And also, I might have missed it on the call, but the SG&A for the quarter was a bit elevated. I think it was due to salaries and performance bonuses. How should we think about that going forward?
spk05: Yeah, you're right. That's exactly what caused that number to move up. You know, I think, you know, obviously with the guidance, the full-year guidance that we've provided, you know, The 4.5 to 5% operating income margin, that's really where I'd like you to focus. Obviously, that requires gross margin to be higher than SG&A by that range. And so rather than trying to give you an SG&A number and a gross margin number, I'd want you to just focus on that range of operating income margin between 4.5 and 5.
spk02: Okay, thank you. That's helpful. You've been able to manage your working capital very well and building up quite some nice cash and it seems like you're going to continue to generate good cash. What are you thinking about the use of cash going forward?
spk05: Well, first and foremost, supporting our organic growth. As we announced in previous calls and reiterated today, the expansions, much-needed capacity expansions in Thailand and Mexico, funding those types of expansions to support what we see as a very strong organic growth funnel of new opportunities. And just a comment on the working capital, I'm just so pleased with the results this past year, improving our cash conversion cycle. I think structurally now with these improvements this year, we're about where we expect a business to run for various reasons that we talked about in previous quarters. We had higher inventory levels, for example, and we explained why. But with the work we did this past year, I think structurally with the cash conversion cycle, cash conversion days being at 64, structurally that's where we expect the business to run. So going forward, you know, the working capital in dollars will increase commensurately with the top line growth. So that's a funding need as well when we think about growth going forward. It's not just CapEx. It's having that working capital grow with that top line. And that absolutely is our number one priority for capital allocation.
spk02: Okay. Thank you. That was all from me.
spk05: Thank you, Anya.
spk00: Again, if you would like to ask a question, press star one. The next question comes from the line of Mike Moros with Walton Housing and Company.
spk04: Hey, good morning, Dawn. Good morning, Jenna. Thanks for taking the question. Good morning, Mike. So I'll echo the congratulations. Phenomenal work on the strong quarter and the great year, especially with everything that you and the rest of the industry have had to deal with. Really great numbers that you folks have put up. And I kind of want to start on understanding, you know, just how you guys did that. Certainly dealing with tight supply chains is in your guys' DNA, and that's what you do. Thinking about the last quarter, there were concerns about decommits on the supply chain. It seems like you navigated through that without too many of that or those happening. With where you were sitting today, has the outlook materially changed at all from what you were seeing last quarter, either positively or negatively?
spk05: We've You know, in the whole, let's say, semiconductor shortage area, we've seen areas of improvement. We've actually seen some areas that have gotten worse. So it's a bit of a mixed bag. You know, I think, as I mentioned in the last call, we're fortunate in that, you know, many of, especially in our automotive business, many of the vehicles that we have content on through our customers are Our priority vehicles, vehicles that are getting priority with the chip shortages, that helps. But it's been impactful. And as we mentioned, you know, we have a fair amount of shippable backlog that continues to move out ahead of us. And we're trying to manage that the best we can. In other words, organizing ourselves and planning ourselves around the gate, the gating item. We spend a lot of time, our operations team spent a lot of time trying to get that right. That's a lot of extra work, but it helps minimize the disruption of the shortages. You know, it's hard to put an exact number on the shippable backlog that's rolling out ahead of us, but when you think about our guidance for the full year in that $1.4 billion to $1.5 billion range, as you know, Mike, we've had a target of growing the business around 8% organically. So that's sort of the low end of our range. The high end, you know, really contemplates catching up some of that surplus backlog. So it gives you kind of an idea of how much that shippable backlog, how much in dollars that's moving out ahead of us. So that's something we really want to watch carefully, have a good plan to catch up on so that we can continue to support our customers the way we have been and get them back to the inventory levels they need to execute their plans as well. We're not out of it. The first half of fiscal year 2022, we believe, is going to continue to be challenging with these part shortages. And we're going to have to do what we did last quarter for a couple more quarters before we could expect that the supply would catch up with demand. That's why we're talking about 22 being two different halves for us. And, you know, we're optimistic it will improve. Most analysts are predicting that the situation will just continue to improve over the next couple of quarters. And we're hopeful for that because that would really allow us to, again, focus our energies on other aspects of running the business.
spk04: That's really helpful. And in your response there, you kind of touched on guidance, which I'd like to turn to. As a shareholder, really appreciate the business being at a point where you guys are comfortable going out and putting these numbers out here. I think that really speaks as a testament to the improvements that you guys have made and where the business is at today. Thinking about the targets that you folks have laid out, historically, when you've talked about that top line growth at 8% and an operating margin target at around 4.5%, you mentioned it in your response just before that those are now kind of the low end of the guidance that you've put out. So my question is, you know, as we think about longer term targets and the outlook for the business, you know, has that 4.5% operating margin target that you guys talked about in the past should we now think about a long-term target? Is that four and a half to 5%? Um, or, you know, is there an opportunity for you guys to revisit and talk about longer term targets beyond that? Um, just how are you thinking about it, uh, as a whole now?
spk05: Well, definitely staying on the operating income target. As you know, we, we put that target out there for ourselves. Um, must at least be a few years ago, uh, quite a while ago at least. And, uh, And we pushed ourselves hard to get there and to get there on a more consistent basis with real improvements in our operations, better operating leverage, better use of our footprint, really focusing on the things we have to do to truly make those improvements that we could then predict going forward. Our teams have done a great job, and despite all the headwinds we talked about, the pandemic and the shortages, We believe that we've made sustainable improvements in our factories and in our supply chain activities. Now, we're still battling some of those things that other manufacturing companies are battling, whether it's worker shortages, increases in wages and salaries, and other inflationary costs around raw material. But we believe we've made improvements that are sustainable. We're going to work our way through those issues and We think it's time to raise our expectations from that 4.5% target that we put out there those years ago and be in that landing area, if you will, between 4.5% and 5% on a consistent basis. We were just really tickled this year to be able to finish the full year with all four quarters above 4.5%. And we had to prove that to ourselves, that we think that those improvements are then sustainable going forward. But we believe they are.
spk04: Great. I think all of that makes perfect sense. Don Jana, thank you so much for the color. Stay safe.
spk05: Thanks, Mike. You too.
spk00: Again, if you would like to ask a question, press star 1. That is star 1 for questions. I will now turn it back over to Don Cherian for closing remarks.
spk05: Thank you. That brings us to the end of today's call. We appreciate your interest and look forward to speaking with you on our next call. Thank you and have a great day.
spk00: This concludes today's presentation. You may now disconnect.
Disclaimer