Kimball Electronics, Inc.

Good morning, ladies and gentlemen, and welcome to the Kimball Electronic Third Quarter Fiscal Earnings Conference Call. My name is Donyell, and I will be the facilitator for today's call. All lines have been placed in a listening-only mode to prevent any background noise. After the completion of the prepared remarks from the Kimball Electronics Leadership Team, there will be a question-and-answer period. To ask a question, simply press star and the number 1 on your telephone keypad. Today's call, May 6, 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 now like to turn the call over to Andy Regroup, Vice President in Investors Relations. Mr. Regroup, please, you may begin.

Andy Regroup Thank you, Donyell, and good morning, everyone. Welcome to our third quarter conference call. With me here today is Don Sharon, our chairman and CEO, and Janet Kroon, chief financial officer. We issued a press release yesterday afternoon with our results for the third 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 FCC filings, and that actual results can differ materially from the 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. Good morning, everyone. I'm very pleased with the incredibly strong results in Q3. Sales exceeded our all-time high in a quarter by 10%. Operating margin was 5.5% of net sales, which is significantly better than the first half of the fiscal year and 80 basis points higher than a year ago. diluted EPS increased more than 30% year over year. With our backlog of open orders at record levels and manufacturing facilities running at higher utilization and capacity expansions underway, we are ideally positioned to maintain strength and momentum in this bifurcated year, and we expect the strong pace to carry through the fourth quarter. Further, given the strength of our funnel, and a slate of new product introductions, we are well positioned to continue this solid performance into fiscal year 2023 and beyond. I continue to be extremely impressed with our team and how we've managed the global supply chain issues stemming from the pandemic and the component shortages. The challenges in Q3, however, were compounded by the devastation in Ukraine. We have Ukrainian associates in our US and European operations and facilities located in nearby Poland and Romania. Our number one priority has been the health and safety of our associates and supporting their families directly affected by the conflict. Many of these individuals are actively involved in refugee support efforts, and our company has made monetary donations as well. Our hearts and thoughts are with all people both inside and outside the Kimbell Electronics family. impacted by this tragic turn of events. We've also taken appropriate measures to safeguard our business and continue to fulfill customer commitments. In March, I traveled to our facility in Poznan, which is located in western Poland, roughly 240 kilometers from Berlin, to meet with our team and tour the facility. We employ approximately 1,000 associates there and recently announced an expansion targeted for completion in early fiscal year 2024. I'm pleased to report the morale of the team is positive and upbeat. The business is operating well, all things considered. And the expansion remains on schedule. We continue to monitor and evaluate information, including concerns over securing ample natural gas and other resources for our facilities. Longer term, it's estimated the conflict could cause incremental stress on global supply chains and further disrupt the auto industry. Russia is a large exporter of commodities, including metals and mining output. Relative to car manufacturing, they are a major supplier of palladium, platinum, nickel, and aluminum. Palladium and platinum are key raw materials for catalytic converters. Nickel is used in electric vehicle batteries. and aluminum and copper are needed for vehicle framing and wiring. Recently, prices for these commodities have been on the rise. However, with multiple global sources for the materials, the price movement has been characterized as manageable. Ukraine also plays an important role in the auto industry by producing wiring harnesses for cars and being a supplier of neon and other noble gases that are critical for semiconductor production. Not surprisingly, many of the factories making these components have slowed or shut down altogether in the face of the conflict. There is some speculation that combined impact from Russia and Ukraine will increase auto parts shortages and adversely affect car manufacturing in Eastern Europe and Germany. This is supported by Volkswagen's announcement earlier this year to cut production estimates for 2022. Some believe these steps could create an opportunity for Chinese automakers to fill the demand. However, given the fluidity of the situation, only time will tell. Please keep in mind that we do not directly purchase any materials from Russia or Ukraine, and the financial impact of the conflict on our operations in the quarter was not material. One additional risk we are monitoring is the ongoing impact of China's zero tolerance policy related to COVID. As you know, several cities experienced shutdowns recently due to a rise in the number of COVID cases. If shutdowns continue to occur in major cities across China, there may be temporary disruptions in both the supply chain and demand as our customers balance manufacturing delays. This concern is somewhat offset by the record output of semiconductors coming out of the Taiwanese market, a response to global demand. We've updated our outlook for net sales to reflect the uncertainty from these developments. And while we are reiterating our guidance for operating income margin for fiscal year 2022, we expect it to come in at the lower end of the range. We anticipate the impacts of the China COVID lockdowns to be shorter term in nature and that any temporary disruptions will rectify over time. Turning back to the third quarter, net sales were $368 million, a 19% increase compared to Q3 last year, and $50 million higher than Q2. The strength this quarter occurred in all four vertical markets, with sales in automotive exceeding $160 million, a 16% increase year over year, and we're 44% of our total company sales in the quarter. This represents an all time high for the automotive vertical market and resulted from the ramp up of certain programs, including programs supporting fully electric vehicles. It's also quite a turnaround from the second quarter when component shortages drove a decline in sales. But as conditions improved in Q3 and parts became more available, we were ready to respond. The investments made throughout the pandemic to maintain our highly trained workforce and strategic inventory builds in the first half of the fiscal year, both allowed us to quickly increase production in response to the strong worldwide demand for vehicles. During the quarter, we also completed our multi-year strategic plan with a comprehensive analysis of our positioning and growth opportunities within each vertical market. Our work confirmed that the megatrends in the auto industry continue to represent a meaningful tailwind for our company. as electronic content is being added to cars and trucks at an increasing rate with advanced technologies and expanded operating systems. In addition, we see the rapid adoption of electric vehicles, the expansion of autonomous driving, and vehicles with increasing connectivity as additional areas of upside where our chassis control expertise and core manufacturing competencies could align very well with the stringent production requirements of the automotive industry. Net sales in medical were $103 million, a 20% increase compared to Q3 of last year, and represented 28% of our total company sales. This is a very good result for the medical vertical market and suggests the industry is continuing to recover and normalize from the pandemic. The increase this quarter was driven by the launch and ramp-up of new programs, some of which are coming online in a quarter after pandemic-related delays. Similar to automotives, The work in our strategic plan validated the long-term growth opportunities in medical, resulting from megatrends in the healthcare industry, including the world's aging population, increasing access and affordability to healthcare, and decreasing device sizes and connected drug delivery systems. Industrial was up 22% in Q3, with sales totaling $84 million, representing 23% of our total sales. Once again this quarter, higher end market demand for climate control products and new customer additions drove the increase. Longer term, we continue to see growth opportunities for this vertical. as the importance of consumption, awareness, and conservation of water, gas, and electricity continues to increase globally. And finally, sales on our public safety vertical were $13.8 million, a 2% increase compared to the third quarter of last year. So in summary, an excellent quarter and a promising outlook. I'll now turn the call over to Jana to discuss Q3 in more detail and review our guidance for the balance of the year. Jana?