Kimball Electronics, Inc. (KE) Earnings Call Transcript & Summary

Good morning, and again, welcome to our fiscal year 2020 Annual Shareholders' Meeting. As a reminder, certain statements contained within this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Specific risk factors can be found in our annual report on Form 10-K for our fiscal year ended June 30, 2020. Please keep this in mind as we present our materials today. Fiscal year 2020 certainly turned out to be a year of new challenges and opportunities for our company. We started the year with a solid plan, and we're very optimistic about the outlook ahead. The first half of the year was impacted by the GM Auto workers strike and who would have predicted the disruption caused by COVID-19 in the second half. In spite of the challenges, we believe we ended the year with respectable results. I will provide a brief update on our 2020 financial performance, and I'll wrap up with our Q1 fiscal year 2021 financial results, which we just reported. To learn even more about your company's financial results, I encourage you to take some time to review our annual report, which includes the 10-K financial report and our recently filed 10-Q quarterly report of earnings for fiscal Q1 fiscal year 2021, which can be found on our Investor Relations website. There's a lot of good information included in these reports. And of course, they represent a lot of very good work by our finance team. Before I jump into the numbers, I do want to take just a moment to thank our over 6,400 employees around the world for their support and hard work during these challenging times. It is because of your dedication and support that we're able to continue supporting our purpose of creating quality for life through the products and services we provide. Now beginning with our top line performance, we ended the year with 2% growth year-over-year, achieving a new annual record for net sales of $1.2 billion. Our revenue trend has resulted in a 9% compound annual growth rate from fiscal year 2016 to fiscal year 2020, which is well above the EMS average growth rate. Pre-COVID-19 for the calendar year 2019, we grew approximately 13%, while the worldwide contract manufacturing market per marketing -- per Manufacturing Market Insider, grew at a rate of 2.5%. Diversification in revenue across our targeted verticals is important to the financial health of our company. While we saw some mix movement between verticals, we continue to maintain a healthy mix in fiscal year 2020. Looking a little closer at our sales by end market vertical. Sales in our Automotive end market were down 4% in fiscal year 2020, primarily due to COVID-19-related plant shutdowns in the fourth quarter. Revenues were down 43% in Q4 as compared to the same quarter in fiscal 2019. Our Medical end market vertical sales were up 8% due to COVID-19-related increases in demand for respiratory care and patient monitoring products, which occurred in Q4. Our Industrial vertical was up 6%, helped by increased traction of the Global Equipment Services, or GES, acquisition that closed in fiscal year 2019 and increased smart metering sales. The Public Safety vertical was down 15%, mainly due to certain legacy products reaching end of life. Because of our continued focus on strategically diversifying our product portfolio, we were able to minimize the negative effects of the COVID-19 impact on Q4 of our fiscal year and ended the year with 2% year-over-year growth. Our adjusted operating margins ended the year at 3.3%, down from 3.5% in fiscal year 2019 and short of our 4.5% goal. While we were disappointed that we did not achieve our goal, we were pleased with the efforts of our teams to minimize the impact of the pandemic on our financial results. Margin improvement continues to be an area of focus for our company. Adjusted EBITDA margin in fiscal year 2020 finished at 6%, which was the same as fiscal year 2019, reflecting, again, the results of our team's efforts to manage through the pandemic. During fiscal year 2020, we invested $39 million in capital expenditures to support new program awards and capacity needs. Capital increases were also in support of increased demand for medical products directly related to COVID-19. Our fiscal year 2020 capital allocation is focused on organic growth and in the second half, supporting the increase in demand for medical products. Our primary focus for capital allocations will continue to be on supporting our organic growth initiatives. Acquisitions and share repurchases will also continue to play a strategic role in our capital allocation strategy. Our company continues to have a strong balance sheet and ample liquidity to support our growth initiatives. We ended the year with $65 million in cash and cash equivalents. And our short-term liquidity available totaled $143 million, which included an additional $30 million secondary short-term credit facility, which we entered into in May, to support anticipated liquidity needs for increased medical device demand related to the COVID-19 pandemic. Cash flow from operations finished at a record of over $70 million. While our EPS performance was down a bit, overall, we were pleased with where we landed in fiscal year 2020, given the impact of the pandemic on the second half of the year. We are continuing our focus on growth, margin improvement and achieving our return on invested capital goals and are off to a great start in fiscal 2021, which we'll see in a few slides. We closed the year with $379.4 million in shareowners' equity and returned $8.8 million to our shareowners through our share repurchase program in fiscal year 2020. We suspended our buyback program late in the year due to COVID-19 uncertainties and to preserve capital. We are disappointed in our return on capital trend and are working diligently to improve working capital and the utilization of new capital deployed during the year. As volumes return to pre-COVID-19 levels, we expect significant improvement in our return on invested capital metrics. Last week, we reported our Q1 fiscal year 2021 financial results. I wanted to share just a few highlights from those results. We had record quarterly financial results on several key metrics. Net sales were up 6% from Q1 fiscal year 2020 and a record $331.7 million, and our Medical vertical was up 25% from prior year Q1 to a new record level as well. Our Automotive vertical improved 61% from Q4 of fiscal year 2020 levels. Operating margin increased to 5.4%, and we had a record EPS quarter of $0.66. We also generated $20.7 million in operating cash flow in the quarter. We continue to invest in new equipment to support organic growth and invested $8.5 million in the first quarter of 2021. Our liquidity continues to position us well to support our growth initiatives and to weather the impact of the pandemic on our business. We ended the quarter with $73 million in cash and cash equivalents and $159 million in total liquidity. We're off to a strong financial start for the new fiscal year. Now we'll hear from Don.

Thank you, Mike. The COVID-19 pandemic has been hard on all of us. For Kimball Electronics, COVID-19 disrupted our operations in China during the initial outbreak back in February of this year, followed by impacts to our suppliers and eventually as the spread continued, facilities in Asia, Europe and North America. Our facilities in the United States were deemed essential businesses due to our production of various different products, including the supply of medical assemblies. Throughout the pandemic, we have continued to deliver on our promises to keep our employees safe while meeting the needs of our customers. Successes include supporting the significant increases from our medical customers for respiratory care and patient monitoring products for COVID-19 patients. During the year, a 87 million essential assemblies were manufactured and shipped during the pandemic. We continue our COVID-19 protocols in accordance with country-specific state and local health recommendations during our phased approach to normal operations. Measures we continue to take include mandatory face mask in all facilities and utilization of protection shields, proper hygiene practices and sanitization of facilities, body temperature scanning, work from home and remote work where possible, social distancing and virtual visits for suppliers and customers. I hope that you had the chance to see our annual report and this year's theme, Creating Quality for Life, which is our company's purpose statement. Living our guiding principles gives us a strong sense of purpose. I would like to spend some time today talking about our company's purpose statement and explaining how our strong sense of purpose inspires and motivates us every day to do the right thing and positively impact the lives of others. We create quality for life through the many life-saving and life-improving products and services we provide for our customers and their end users. We also create quality for life for our people by supporting meaningful work and through a respectful and rewarding company culture that keeps their best interest in mind, and for our communities, through our positive social and environmental impacts. We create quality for life for our suppliers by building valuable partnerships critical to achieving a sustainable, efficient and reliable supply chain. And finally, we create quality for life for our shareowners by providing a positive financial return and a sound financial investment. We understand each customer. Each of our customers has a different set of standards for their products. So our capabilities are uniquely tailored to meet each one by leveraging our focused market core competencies, customer aligned global footprint, disciplined culture, Industry 4.0 experience and commitment to lasting relationships. We find solutions where others haven't. You can see on this slide how our strong sense of purpose has helped us build long-term customer relationships. Looking to the right-hand side of the slide, you can see that 76% of our fiscal year 2020 net sales came from customers that we have been doing business with for more than 10 years. The success in growing our sales in our medical end market vertical can also be linked to our strong sense of purpose. Our people understand that the quality of our work is critical because someone's life may depend on it. Over 43 million lives were positively impacted by our health care products that we help produce this year. Creating quality for life goes beyond how we live and work today to how we will live and work in the future. Within our Industry 4.0 strategy, we are designing and building the smart factory of the future, and we are very excited about the possibilities. With the help of tools such as EM tab, other important areas of development such as machine learning, real-time data collection for better electronic process controls, predictive analysis, smart maintenance, automation and robotics, we are becoming a better manufacturing company, one that is preparing for the future. Creating quality of life for our employees starts with our commitment to be a great place to work. We connect our people to a shared purpose and human-centered talent systems to develop a culture of mutual respect, recognition, opportunity and success. This culture, in turn, informs every decision we make as a company. Fostering our strong company culture, rewarding success and developing our talent are the keys to our continued success. We have just over 6,400 dedicated employees around the world with over 40,500 years of service with our company. That's an average of over 6 years of service per employee. That's a very important part of our success as a company, and it will play a very important part of our success in the future. Leading the Kimball way is a call for each of us to work on becoming the best possible version of ourselves. Leading the Kimball way is the foundation on which we build success. Our structured talent development journey encourages our people to first be a catalyst for growth, have an enterprise mindset, cultivate talent, show courage and build followership. As we stated in our guiding principles, our people are the company, they want to make a difference, and they are. They are creating quality for life. As a global manufacturing services company, we recognize that our people make the difference. We recognize the benefits of a diverse and inclusive workforce by developing a talent pipeline that truly reflects our broad customer base. We are better able to meet the unique needs of each partnership. We encourage all employees to participate in our survey that measures how well we're doing as a company, so that we may continue to improve our workplace. Based on those survey results, 8 out of 10 was the collective score by Kimball Electronics employees in our guiding principal surveys this past year. People with a purpose can change the world, one kind act at a time. Our people find meaningful ways to give back to the communities that we live and work in. And we, as a company, do our best to get our muscle behind their plans. By minimizing our environmental impacts with responsible manufacturing practices and by supporting local causes that improve the livelihoods of our neighbors, we help ensure a better tomorrow. Creating quality for life or environment is more important today than ever. Our impact on global climate is real. We strive to reduce our energy usage and greenhouse gas footprint, and that starts with our environmental, health and safety teams around the world and the sharing of best practices from one location to the other. We again made significant progress in this area, reducing waste by 10%, air emissions by 23%, water usage by 40%, greenhouse gases by 57% and hazardous waste by 52% this past year. You can learn more about our environmental, social and governance efforts in our second annual ESG report, which will be published in December. I hope you have the opportunity to review it. We could not pursue our purpose without our supply partners. Building valuable supplier partnerships, those which benefit both parties is critical to achieving a sustainable, efficient and reliable supply chain. By establishing relationships built on trust, accountability and open lines of communication, our suppliers help us realize our goals for growth around the world. Specifically, as it relates to the COVID-19 pandemic and our response to support our customers in the significant increases of production for respiratory care and patient monitoring products, we had to count on our supply chain to help us deliver on our promises. The increase in demand was significant, in some cases, tenfold. Sourcing obstacles across that normally don't occur -- sourcing obstacles arose that don't normally occur because of the significant increases. Short-term spikes in demand for some components made it very difficult to find alternate sources. We met the challenge by leveraging the goodwill previously established within our supply chain relationships, and we developed, in the end, flexible solutions that fulfilled our customers' needs. And finally, creating quality supply for our shareowners. The culmination of our efforts to nurture and grow the relationships with our customers, employees and suppliers is ultimately increased value for our shareowners. Formed and shaped by our guiding principles, our company culture and core values derive from our basic but very important beliefs. Our customers, our business, our people are the company. The environment is our home, and profits are the ultimate measure. I would like to close my presentation today by saying that we remain intensely focused on managing through the pandemic and executing our strategy for long-term profitable growth. Now we would like to open things up if there are shareowner questions that have been entered on the web portal. Please note, we will attempt to answer as many questions as time allows. But only questions that are germane to the meeting will be addressed.

Mr. Chairman, we have no questions in the queue.

Thank you, John, and thank you to all of you for your interest and investment in Kimball Electronics and for coming this morning. Our webcast is now concluded. Thank you.