Kimball Electronics, Inc.

Good morning ladies and gentlemen. Welcome to the Kimbell Electronics second quarter fiscal 2022 earnings conference call. My name is Victoria and I'll be the facilitator for today's call. All lines have been placed in a listen only mode to prevent any background noise. After the completion of the prepared remarks from the Kimbell Electronics leadership team, there will be a question and answer period. To ask a question, simply press star and the number one on your telephone keypad. Today's call, February 8, 2022, 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 Regret, head of investor relations. Mr. Regret, you may begin.

Thank you, Victoria, and good morning, everyone. Welcome to our second quarter conference call. With me here today is Don Sheeran, our chairman and CEO of and Jana Kroon, Vice President, Chief Financial Officer. We issued a press release yesterday afternoon with our results for the second quarter of fiscal 2022. 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 filings. and that actual results can differ materially from forward-looking statements. All commentary today is focused on adjusted non-GAAP results. Reconciliations of GAAP to non-GAAP amounts are available in our press release. This morning, Don will start the call with a few opening comments. Jana will review the financial results for the quarter 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.

Thanks, Andy, and good morning, everyone. Q2 was another hard-fought quarter for our company as global supply chain issues stemming from the COVID-19 pandemic persisted and adversely impacted our results. Component shortages continue to make it extremely challenging to obtain the materials needed to support customer demand. While conditions improved modestly in December with sales accelerating, the loss absorption was significant once again this quarter as we remain committed to retaining our highly skilled workforce in anticipation of a strong second half to the fiscal year. We continue to be well positioned with record levels of backlog, and we are reiterating our sales guidance for fiscal year 2022, although we expect to finish the year at the lower end of the range. We are revising our operating income margin guidance to reflect the difficult first half and our outlook for the balance of the fiscal year. Our manufacturing facilities worldwide have been ramping up production with the expectation of running several lines at maximum capacity in the months and quarters to come. In many instances, we are the single source supplier for our customers, so they share our eagerness for conditions to normalize so that we can both deliver on our contractual agreements. We believe transparency builds trust, and I'm proud to report our teams have faced these unprecedented times head on with customer collaboration at levels even higher than our award-winning norm. The partnerships we form through this collaboration often lead to new opportunities, and I'm excited to announce our plans to expand the facility imposed in Poland. This is our third facility expansion in the last 15 months and is representative of our high level of success in winning new business. Similar to Thailand and Mexico, the additional capacity is needed for programs with new and existing customers. We expect the expansion in Poznan to add approximately 40% to existing production square footage, and we will leverage our team in Poland to support our customers based in Europe when the expansion is completed in early fiscal year 2024. We are updating our guidance for capital expenditures in fiscal year 2022, which will include early investments in Poznan, and additional capital related to a major win with a long-standing customer whose next-generation electronic braking system will support one of the most popular vehicles in the world. This investment is incremental to the current facility expansion in Reynosa, and similar to Poland, reflects the success we're experiencing in new business development activities. With the expansions in Thailand, Mexico, and Poland, We will expand our square footage and capabilities to support growth potential in excess of $2 billion of annual revenue. This is critical as we look at the strength of our funnel and newly awarded programs. While we are disappointed in the first half and outcome driven by the material shortages and the resulting lower forecast for operating income in fiscal year 2022, We fully anticipate returning to an annual run rate for operating income levels in a range of 4.5 to 5% of net sales as the supply chain normalizes. In fact, we expect our second half to ramp up significantly throughout the period with a very strong finish to the fiscal year and operating income above that range as we work down the backlog of orders. Turning back to the results for the second quarter, Net sales were down 2% versus Q2 last year, and while three or four vertical markets reported increases year over year, it was not enough to offset automotive, which was down 8% in the quarter when compared to the record sales level of Q2 last year. This represents the first quarterly decline in automotive in over a year, with the shortage of semiconductors largely responsible for the shortfall. The impact of the pandemic on this industry has been well publicized, with an estimated 7 million vehicles worldwide cut from production in calendar year 2021. While consumer demand exceeded the resulting limited supply, OEMs are forecasting double-digit growth as the industry looks to recover, and consumers are becoming increasingly more accustomed to longer lead times and higher sticker prices. These new industry dynamics, combined with the megatrend to add electronic content to vehicles through advanced technologies and expanded operating systems, represent a meaningful organic growth opportunity for the automotive vertical market in the years to come. As a reminder, many of the new applications that we support are largely the same for both electric and internal combustion engines, and the stringent production standards in the automotive industry aligned very well with our core manufacturing competencies. Sales in the medical vertical market increased 3% in Q2, a welcomed rebound to a business that has experienced ebbs and flows throughout the pandemic. The increase this quarter was driven by the launch and ramp-up of new products. Longer term, we remain very positive on the growth opportunities in our medical business, with megatrends in the healthcare industry providing an excellent setup. This includes an aging population, increasing access and affordability to care, decreasing device sizes, and connected drug delivery systems. Additionally, our focus on medical markets, as demonstrated by the launch of Kimbell Medical Solutions, should continue to drive growth in the medical vertical, supporting our goal of 30% of our revenue coming from this space. The industrial vertical market also finished the second quarter with sales increasing, up 6%. Similar to medical, we're glad to see industrial show some early signs of bouncing back from today's challenging operating environment. This is an encouraging step toward returning to growth in this business, which we commonly refer to as green and clean. Climate control, smart metering, and new customer additions drove the increase in Q2 and represent the longer-term growth opportunities as individual awareness of consumption and ultimately conservation of water, gas, and electricity increases in popularity in Europe and eventually the U.S. And finally, sales and public safety were $10.8 million, a 3% increase compared to the second quarter of last year. So in summary, a challenging quarter with very good work from our team and tough conditions. We are seeing signs of improvement as evidenced by the higher level of sales in Q2 compared to Q1, an 8% increase, with December being the best month. I'll now turn the call over to Jana to discuss Q2 results in more detail. She will also review our updated guidance for fiscal year 2022. Jana?