Release Date: August 14, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Kimball Electronics Inc (KE, Financial) successfully completed the divestiture of its automation test and measurement (AT&M) business, which is expected to sharpen the company's strategic focus and improve profitability.
- The company reported a $112 million or 25% reduction in inventory levels compared to Q4 last year, indicating effective working capital management.
- Kimball Electronics Inc (KE) has secured new medical wins and continues to focus on higher-level assemblies and finished medical device opportunities, which are expected to drive future growth.
- The company has a strong balance sheet with increased liquidity and financial flexibility, supported by the proceeds from the AT&M sale and improvements in working capital management.
- Kimball Electronics Inc (KE) has a robust long-term customer funnel and continues to explore opportunities in new geographies and capabilities, particularly in the medical space.
Negative Points
- Net sales in the fourth quarter were $430 million, a 13% decrease compared to Q4 last year, reflecting a challenging operating environment.
- The gross margin rate in Q4 was 8.5%, a 150 basis points decline compared to the fourth quarter of fiscal 2023, due to lower absorption in EMS manufacturing facilities and weaker performance in AT&M.
- The automotive vertical, which is the largest business segment, saw a 7% decrease in net sales compared to Q4 last year, impacting overall revenue.
- The medical vertical experienced a 17% decrease in net sales in Q4 compared to the same period last year, primarily driven by lost revenue associated with a customer involved in an FDA recall.
- The industrial vertical saw a 19% decline in net sales compared to the fourth quarter last year, with significant weakness in the AT&M business and lower demand for internal climate control systems and smart meters in Europe.
Q & A Highlights
Q: How will the relocation of a customer's product line from the US to Mexico and the shift towards steer-by-wire technology affect Kimball?
A: (Jana Croom, CFO) Kimball is actively involved in the steer-by-wire supply chain, and the company is prepared to serve in Mexico and China, where it has significant available capacity. The relocation and technology shift were anticipated, and Kimball is ready to support these changes.
Q: What is the expected revenue mix for fiscal 2025?
A: (Jana Croom, CFO) The impact in medical will be the most modest due to the FDA recall already reflected in FY24. North American and Chinese automotive markets are being closely monitored, and European industrial is expected to be weak but could be stronger than anticipated.
Q: How will Kimball address the commoditization of smart meters in the industrial vertical?
A: (Richard Phillips, CEO) Kimball expects growth from climate control products, factory automation, and off-highway equipment. The company is well-positioned to capitalize on these areas and sees factory automation as a significant growth opportunity.
Q: Are the softer demand profiles due to program cancellations or delays?
A: (Richard Phillips, CEO) The softer demand is primarily due to demand push-outs rather than program cancellations. The company continues to win programs and maintain strong customer relationships, with expectations for demand normalization possibly in the second half of calendar 2025.
Q: What is the revenue impact of the Tier 1 customer no longer producing a braking system for an OEM?
A: (Jana Croom, CFO) The revenue impact is similar in scale to the FDA recall. The relationship with the Tier 1 customer remains strong, and Kimball is working on new programs to backfill the lost volumes.
Q: How will electric vehicle tariffs impact Kimball's growth plans in China?
A: (Richard Phillips, CEO) Kimball's business in China is China-for-China, meaning it is not an export market. The company remains optimistic about the long-term penetration of electric vehicles and continues to support its customers in China.
Q: Will the recent program delays affect Kimball's share repurchase plans?
A: (Jana Croom, CFO) The share repurchase program will continue as planned. The company aims to align EPS with actual growth and return value to shareholders, supported by significant cash flow improvements and a strong balance sheet.
Q: What is the outlook for inventory digestion across the three major verticals?
A: (Jana Croom, CFO) Kimball made significant progress in FY24, reducing inventory by $112 million. The company expects a smaller decline in FY25, with free cash flow generation similar to FY24. The backlog of inventory from FY22 and FY23 has largely been addressed, with some remaining in automotive.
Q: How will Kimball allocate its CapEx in fiscal 2025?
A: (Jana Croom, CFO) CapEx will be evenly split between growth and maintenance, with significant programs starting in FY26. The focus will be on automotive and medical, with some industrial investments, depending on program launches and business needs.
Q: What is the main reason for the Tier 1 customer no longer producing the braking system for the OEM?
A: (Jana Croom, CFO) The change was due to a commercial agreement between the OEM and another provider, not related to the quality or price of the product produced by Kimball or the Tier 1 customer. The relationship with the Tier 1 customer remains strong, and Kimball is working on new programs to replace the lost volumes.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
