KE - Earnings call transcript Q2 2019 | Kimball Electronics, Inc.

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Operator

Good morning, ladies and gentlemen. My name is Josh, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimball Electronics Second Quarter Fiscal 2019 Financial Results Conference Call. [Operator Instructions]. Today's call, February 7, 2019, will be recorded and may contain forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. XXXX, influence Kimball's of XX-K annual year June may be statements for that release. ended in today's seen report XX, Factors the forward-looking outcome can the Risk in and on Form The panel Charron, the Chief Sergesketter, and Board Financial Mike is Officer Executive and Electronics. President Chairman Officer; of Chief Vice today's for call Don and of Kimball turn I call over like Charron. to today's now would Don to Mr. begin. may you Charron,

Donald Charron

call. Josh. Welcome, our everyone, conference you, Thank second to quarter

on the earnings of was release yesterday afternoon XX, Our quarter second December results ended issued our XXXX.

our made solutions find webcast overview. will diversify summary component We we to took GES, a a a progress provider. solid in growth primarily our by to posted shortages the I answer step Downloads call. that, We webcast, helped achieved business. new in our Or have trade in it the conference turn website global more conditions, uncertainties. launches strategy begin listening X can acquisition continued the ramp-up overall year-over-year The verticals of programs have. Relations good and can on a And a financial in of financial program and our into the X to Events remarks any on offset We than end optimizing presentation certain few that over may other market softness with found then tab of you're multifaceted the as accompany After our macroeconomic core in caused tab. sales Presentations making significant the if it manufacturing for be quarter, I'll this the & on within you presentation we'll questions via Investor Mike by to portal. you

our remains fiscal second We fiscal reach goal operating for XXXX, optimistic XXXX. expect our growth organic in that year the half goal year are of and to X.X% X% we income meet of cautiously for

fiscal improve Margin ramp-up its Sigma of on units, be global to by minimize supply to Across and and yield priorities will tight and component focus Romania initiatives maintain focused market improve points what's disruptions. operating progress experience income efficiency basis the buffer us. necessary capital Our this and and The second Six to in materials XX we to expansion raw drive consolidated margins. prior we impact throughput all improved continues continue secure on stocks continued and to lean projects operation year the quarter. its supply for of shortages, to to continue doing chain our to in and market appropriate to remain compared

XXXX, to XX Our quarter last cash December is the days quarter year. XX, from ended conversion days in increasing the which for days same XX up

levels. to down normal As supply catches demand, up Thus to inventory minimize we work our impact expect direct the far, of to we've the managed back to China tariffs.

impact supplier demand overall a indirect strain and the relationships in China the on However, be to and added customer concern. continues the on

China awaiting the are We trade U.S. talks. outcome anxiously the of

growth to expenditures programs. support sheet part in the in strong We second We investments in continue million and quarter year will fiscal and to further drive to profits. cash launch capital sales ramp-up our that flow the of balance of $X.X invested new and XXXX leverage make in

of fourth GES new industrial the in is capabilities customers. XX, GES and and the and with on on business of test of we diligently finally, technologies smart operations manufacturing the open measurement. brings season GES' total on device our we're since and a year U.S. Vietnam, authorized China, solutions in to and X.X are purchased shares During brings ending share high owners the significant second year season purchasing our June doors to opportunities to current the portfolio $XX.X XX. multi-faceted by customers quarter San quarter degree which and in important it and strategy of also ourselves The with the note fiscal XXXX under being GES. Headquartered our business working contains provider, to ending And a us that the manufacturing in repurchase the December California, GES about program. our excited Japan, our acquisition common step new into of stock, share million million $XX.X XXXX, supports new of quarter and and businesses, our seasonality semiconductor is Jose, in mobile we diversify integration a has low fiscal existing returned to India, being October shares and board million automation,

I turn in more it Now the detail. to quarter our Mike results to your open discuss then questions. second will We'll Mike? over call to

Michael Sergesketter

Don. Thanks,

the Downloads During the website be slide you're I the the comments, will webcast referring to on can Investor Don Relations portal. within my deck, webcast, find & can which you tab via our be the found in Presentations tab. if mentioned, listening on Or Events

As were from $XXX.X net in shown the from adoption second were partially of new offset Europe, to a from X% an each sales by unfavorable our the the our compared of million same degree China quarter. GES for continued rules acquisition -- sales the in Slide and by more our ramp-up foreign our the X% new sales currency of on quarter accounted impact ago a second sales recognition an compared year sales to mix program America the revenue review vertical offset quarter X%, to million, same in XX% new Comparing in vertical net of the accounting was as was in introductions. year, net which movements. of impact prior vertical quarter increase increase Slide to down Sales a X, year $XXX.X market. from demand prior than the automotive North higher sales by X which and lesser represents

from last vertical programs. both was continued for QX ramp-up the Medical in and current existing launches year product to Our of quarter up new increased demand XX% compared

XX% increase climate for of year a the result control a and was with products. as ago industrial the demand up from Our revenue in additional both from associated GES acquisition vertical an

Safety prior year Public and XX% programs. new existing Lastly, product quarter second vertical our for from both increased was from demand launches up the

margin which down in quarter on second gross of X.X%, from in year. the was was second the quarter X.X% Our X reflected Slide fiscal last

second realized impact decrease in borrowings the costs of as When of offset in of related which in compares administrative SERP SERP which X.X% in reduction offset tax of payroll favorably quarter, liability. exactly impacted $XXX,XXX or the million tax unfavorably operating end from current in partially compared income current quarter the by XX.X%. the availability; in the to and $XXX,XXX from adjustment X.X% facilities, offset the plan year. and the provisions in X.X% Our sequentially selling from year to expense first of low the rate again of in a interest on fiscal compared the the tax in the quarter year reported was to by purposes assets, XXXX. the we to income the supplemental component The due and absolute to recent associated line. gross GES selling improved in higher decrease $XXX,XXX margin first prior to current the income the during in our first of significantly the material our X.X% year million prior The acquisition. and increased Selling incentive-based or impacted our in operating interest the financing XX margin earnings losses dollars adjustments. to the to return credits million same quarter related effective second in GES million by in same for our quarter employee $X.X in associated gross quarter quarter less which of the related value to tangible net losses current Sequentially, Slide in of for in share the our second the discrete the state in in basis our expense Cuts year and mix on X was lived the on months from reflects fiscal result to finite more seasonality than acquisition. of and well to expense reform, related points or was trend. fair deck, and primarily The expenses, second quarter the primarily the acquired provision losses higher from adjusted to down Slide to last the our primarily quarter quarter was gains million of $XX.X rate compensation. the which the mature in programs; $XX.X core credit a ago. is and million quarter. in in as effective the Sequentially SERP year profit quarter period, the related selling corporate second income adjustments salary discrete gross and with in margin X quarter, interest improved the was effective acquisition $XX.X SERP net fiscal unfavorable is tax reform The by tax the compares gross discrete million Other deck, XXXX, fair recorded the other quarter. offset $XX.X investments, down sales was administrator The to SERP administrative were million general absolute improved Other a expense second in expense were These was year our per SERP Operating remeasurement the ago and decreases net at $X.X the year liability of of partially the previous Jobs expense $XXX,XXX sales Slide quarter Tax In GES tax of XXXX. largely expense amortization result XXXX with $XXX,XXX tightening X to and year net compared of rate provisions compared costs, fiscal and XX current of investments and on expense were in our $X.XX. Act prior diluted quarter, was value the of for net administrative The tax optimization net unfavorable which second year approximately $X.X or the of the dollars income of to as $XXX,XXX quarter period second impact reduction and were the revaluation the recorded $X down the liability which in ago. year came acquisition. impacted in quarter and quarter, quarter, business year to were recorded income in operating compares expenses second income for product of in retirement a of

net of the tax in provisions income million, in of to of $X.X quarter XXXX, came just Our related $X.X XXXX quarter second at reported to year fiscal in a second GAAP primarily year million which mentioned. fiscal loss the compares reform I the

non-GAAP year the to related second of quarter quarter loss income for which the million earnings -- to $X.X year. the a which quarter for quarter, year, at this was the per in share Our compares Diluted reform. same $X.XX adjusted after of compares year in excluding tax adjustments adjustment prior $X.XX second $X.X net million provision last current to ended fiscal second the

in per earnings to related Operating equivalents the diluted million. when $X.XX the XX. flow quarter $XX for adjustments both Cash December tax the adjusted Slide was Our XXXX, share cash at to reform. on impact a came ago $X.XX provision current and trends in at cash shown XX, year are for non-GAAP compared the

to manage supply capital, inventories primarily assets from increased the the second more certain tightening working Our components. cash of our to cash through operating items related during $X.X of activities by million current to offset of net customer volumes, the and income in flow increase usage in pushout quarter was plus production provided and noncash contract an as the an schedules related increase year than the

flow cash quarter the million. $XX.X was second by Our activities prior provided operating in

prior cash December days appropriate XXXX, XX, stock material when the Our to XX environment. maintain primarily supply conversion in in current inventories months levels increased the for the related compared buffer increase days tight to in X to the ended period year same raw

in manufacture metric, which a that of calculation compared guidance quarter recognized includes metric. our we year of inventory outstanding days with to guidance. new of year the for year and contracts new sales and our day to totaled is increase the million performed primarily receivables conversion inventories we in during second to days result the metric asset relate depreciation our this the as quarter now The from revenue equipment hand, time revenue fiscal recognized production cash prior over in only as the reduction fiscal X-day the days in the to guidance. and capacity. revenue or or product. days revenue Slide reflects relieve asset days investments recognized Our capital with recognized adopted as manufacturing on majority new time XX contract the were time related recognition and XX a contract new date inventory increase when in partially and the X work the addition quarter increase new support our trends. PDSOH, production current over to offset an contract be the revenue of should under largely days revenue awards of The first the accordance to decline Capital day over are asset are acceleration of our a days sales and offset PDSOH for from The $X.X DSO, recognition

acquired of $XX to common for the June well acquisition the used needs which facility million XXXX. part million of borrowings stock. of for in XXXX, were $X as on during Borrowings large GES net the is current up in during acquisition including in we approximately GES of current from repurchases increase million, cash $XX addition, the quarter. The cash, as credit XX, domestic for the year In funding our in December were at cash related

we and represented QX headwinds In in results available million cash XXXX. over the goal amount $XXX liquidity mentioned operating to open X% we do show organic are growth today's with our unused that to short-term fiscal cash for that, expect plus QX Josh, the our the have half conclusion, fiscal of optimistic second for we queue? to in analysts. Don stated, meet remains reach in as did like Our X.X% our questions XXXX, comments, any questions goal he facilities credit December and equivalents of despite year With XXXX. would the the and totaled year improvement income up from analysts his of I XX, our cautiously as at call

Operator

[Operator Instructions].

from comes G. Research. The from first Susanto question Hendi

Hendi Susanto

quantify China? to environment. Mike, result can Don spite of in current Good the and you exposure your

Donald Charron

for Well, we don't disclose reasons. competitive sales by geographic market intelligence region, Hendi,

uncertainties color we It's and could business. for a us. more significant -- the China some had So just and impact on other around decline though that color market pretty a situation the add year-over-year for tariff have sort of double-digit us our global it's

So hopeful China hoping as additional to agreement. results go lows outcome of we something webcast we that thoughts to between, trade that's we new factored not in any about rate can are stated a run adding our as happens, also have I obviously, we about in color we've are Certainly, that year. second in our off as far that, script a terms in steadier it. half that I of say We a U.S. the if forward. fiscal our would as up these new that would with positive But not into move of that improve our we maybe the but go can highs talks

organic rates this restating X% is our factoring or reach so and in can growth, reaching not business think income our operating we those whether goal we're goals X.X% about to And year. as in of talking our we and current run in them are we outlook China

Hendi Susanto

ramp-up how Got Romanian situation the your is of then facility? current the it. And affect

Donald Charron

the slowdown impacted slightly us. are in our Romania continuing make but, significant that stated in Europe, had, we to the seen the as and in are are to by nearly good again we've that But have in script Poland China degree the and slowness China. Romania. in in as some softness some we that, operations again, a not so But slowdown impact we not Well, we seeing progress

a And quarter going results. of fiscal into the income last in into year fiscal compared stated, on impact year ramp-up we improvement fiscal and second up entering Romania terms operating we're nice year of year-over-year picked phase XXXX. to of the of in when another As same this our half we the year this

we our a on Romania think we're we to and to contribute results. continue plan, good got have So positively track to

Hendi Susanto

Okay. major X% that is contributor Don, there fiscal in for way June break what a down of a the growth of organic to growth should be the X% growth organic driver verticals terms year which XXXX? to in

Donald Charron

half what QX. second year down really North Well, even been again, robust us half, what fiscal And story in that's China in you XXXX slow our really first in But really it's the the we given America. hard you. any for the as demand the us started in of beyond give disclosures to see is we've for

of towards are expecting of in that North to be So seen expect we're above look demand we stable of we the for whole -- us factoring lot we've again, as fiscal we half And . improvement robustness a we're the and American second not continue. somewhat Europe half bottoms will in in year second China, the what XXXX,

growth achieve yes, on we're so X% this fiscal help organic America to us year. really counting And North that

Operator

question Walthausen & Morales And Co. from Mike our next of comes

Michael Morales

dig your bit to margins gross little a like I'd into So more.

have is found this an yourself think interesting I that situation in. guys you

I the at China So mature help characterizing me point? programs mature as are in newer your understand, programs having your where programs and Am of are. correct where more this

Donald Charron

Yes.

Michael Morales

Okay.

gross in your compared your North impressive you degree history? margin mature How the seeing this the that said, do to out. that through out margin that your profile you mean, of America progressing programs I strong year are see margin demand you the that -- is with called slowdown kind So called of with performance more given

Donald Charron

off margins little slowdown of as when beyond look look gross a of X% half during America, landing X we and our basis 'XX. renormalization sort out of North and and in pattern landing had of X% down loads points utilization and end of China say, the where closer footprint back year called look XXXX, that growth the second been that we north these that of When ourselves year to in up at When XXX in get the we our we we at pattern we the Yes. see and a this deck. or the we fiscal towards the we've landing footprint, had out bit sort let's of fiscal just from, pattern Slide on of the

we're ourselves to driver year. the So half we'll half behind the our get that's where in second again driving of that fiscal cautious here a that's in optimism to X.X% and big the second

Michael Morales

what shortage, most the you mentioned work Is expect slowdown frame as And far Sure. and on component levels. seeing that you you back as there which you components to on seeing Asia? time on to in tightness of that some give normal you're given anything components in me are side supply the can towards that that

Donald Charron

catching has but for voltage It's are XXXX. the MLCC being we a us, has few yes, several premiums, disruptive in of related, component our -- XXXX. -- of semiconductor in semiconductors of making The to has really to surrounding operations. bit are right cetera. behind well then bringing the grade answer different build I'll that components them major another automotive in MLCCs the customers' to will We've nonautomotive felt a the We are going demand. making components price grade -- the to continue most us the power an as headline been capacitors. so get are more been stop there. Mike, components the grade the there those has shortage market are inflation, that there be really still largest categories was And group. shortages our almost use of capacitors, the starting your good and up Yes, making and to there also issues operations, it's shortage we're to multilayered let's way been throughout of capacity by paying new into that buys now, especially deliveries, and within And that. of automotive of out there more online terms there et those power And The in few in and everything subside is suppliers in affected headway terms at grade. say, versus be spot MLCC part nonautomotive components. to impacted inflation, challenging but expense, able disruption keep question, than,

Michael Morales

Yes, relief perspective, from I is calendar accounting see that maybe story mean, on this this 'XX you looking or the at calendar second [indiscernible] some just half

Donald Charron

reduction. won't conversion efforts we in ending in our XX ending Okay, are the situation do impact the our we the although quarter. by hard. a pretty nice to terms and We a June see by cash working are inventory lot March ongoing, days expect quarter, of XX see improvement But

Michael Morales

That's very helpful.

the for your fourth So now maintained? fiscal that expectation and 'XX of you've quarter, in progressing had thoughts on is portfolio the GES your give that's neutral-to-slightly how accretive can you still in

Donald Charron

our things and assets help positive Their current with further look quality of can somewhat us of have this of X.X that talk lot these of when device the we about we areas. new to confidence regard. so excited things out with really in Yes, smart say GES areas about factory is in are us of been even cyclical. own Those really horizon for the mobile And semiconductor company, business a the very manufacturing GES. acquisition. going about there's more concentrated growth for future about excited strategy, now notoriously strategic can Couple that that as across in portfolio that places doors, we're acquisition came the Industry the future that. excited internal in opening new help the how strategic also we We're our we're about and assets smart

all indicate targets along then exposure our terms by cycle of being publicly yes, we'll there both the accretive And with EPS year us moves the by there and mentioned. that our in ROIC we of So end also we through markets. goes being hit accretive will some that is the to that, we of those year. how But plans stated second third think do said, have that still that seasonality

Michael Morales

then the about And this minimum year in do increases that China? do news progressing How Okay. helpful. we've very think out? was SG&A the some you you of wage on you decline see provided through the hearing that the color How about been shaping given

Donald Charron

Well, it's I and the And cost structure. cost say, of cost of certainly China of a I pressure the is many the that workers think, need in talent is would single world. point. per certainly getting I on categories talent going we everywhere the se, the to wouldn't well of rising some be really cost -- and a pressure these point categories cost out

our we're little we as were SG&A we example. spun for I company we small X-plus all feel leverage company, roughly we years cost and million company, a for that for like cost forward. like sales ago course, But that ambitions leverage, Of in our leverage that to a there. to public grow, run our those terms from when shape as for in getting When structure company, going were feel continue need team, critical. first structure, add require burden, relatively will public But to to our to and managing point our talent so pressure then we have us is strategic that talent -- of in going good management added in for we obviously are opportunities us $XXX We rate. go look have over back costs, those we

that as hopefully terms of find sales to and of in bigger a minds run on our in company gains We productivity we leverage and us the today that's are those something management that's will really bigger cost future, to a structure make we expect company as ways rate, grow to happen. the and be

Michael Morales

Sure. And capital should math Obviously, lastly left there correctly you're the about I $XX the am active my be million-or-so you buyback. doing just on that. If from on on then location priorities.

you forward? capital rank your just allocation can priority So looking

Donald Charron

have Well, topic the very every forward. to board we on the I acquisitions the our the that And agenda active capital allocation priorities last in think we last price move capital this obviously, extent calls, we really the market meeting strategy as we particular allocation, stated quarter. can that right this at in were find

We noticed actually priority large the are certainly had quarters. in there. placed appreciation the on last CapEx X X on our in been with CapEx a below if you and last quarters, We priority a CapEx we've

a up few do could that'll in acquire because We support bit than let's expect has here the them. years. that second some capital the lower But have it's program we last new half been, CapEx tick fiscal wins to been overall, say,

And rate. that forward expect say, that growth to past, of is organic the mid-single-digit growth to a proxy of the a as should bit approximate kind would so some let's of going we depreciation said because CapEx we a in the support,

strategy and you still I And that acquisitions help we'll our requirements subsiding as little bit, so would that's stated, we in board-approved a the for on that. But accelerate the got CapEx, buybacks. so keep room an say, eye

balance as and which those long it balancing have. we'll we with now a carefully So debt, as paying down well our as

those to you've the allocation review past, allocation will future. that what lot think, don't I a Board and the in in see of the the changes act set So priorities we'll every accordingly, seen our quarter, I in and

Operator

from comes Richard Greenberg of Smith question next Donald our & And Co.

Richard Greenberg

goodwill like got to about you of would Q, on -- in and be, -- revenues, book assets time. paid it over XX% that to haven't acquisitions, your intangibles, the compare what's looks Don, but you million be And you but times just to looks when you acquisitions as capital excess X kinds looking intangible implies of $XX just which is took probably a It we and GES. I from like guess, numbers, these your think. there at on know of this versus you most and own you and filed allocation, I say, around balance stock, this industry book of price history you're slight the of and XXX% in happened revenues of those premium and concern

you that price got assets, an like us make seems kind relative comfort take like on? pay to when of to to own gives level me bother which haircut this to those be willing more that it people the really you how much kind you're to your of acquisition soft and What So that of cautious you stock.

Donald Charron

business, we this business Well, we have an and for But an we to go a mentioned. in we the this with what being a acquisition thought just do, the are launch relatively to automation say, of we EMS like, for you like our good in it closer of terms us that new strategy. views within that GES kind in acquisition the strategy, the good quickly able of after the we stretched et our with for our money resources, that a combination like this pay in in strategic for I this tell to synergies target feel us up and business scale business good combination asset cetera. for customer wouldn't same that, I And base, platform was, new combination the test measurement, of really you let's platform to say terms for our acquisition, that would ambitions, traditional us area certainly be just reasons would of that. new just

you tell these for us. So I'm going that to I are -- look, decisions easy not

you time doubt our of described and effort no those very lot So there and a analyzing that teams things into those is very energy for reasons. put

be that and going acquisitions will So as forward. we scrutinize the same

Richard Greenberg

does in of would require your this in new to Do more these higher be that of which more line it multiples business, the acquisitions or future business? traditional be paid you are think kind going

Donald Charron

bit list. higher overpriced, synergy a that our business acquisitions, we've traditional again, just really at good in justify multiples The had those view. couldn't even looked paying if frankly, And we really we for EMS are acquisitions, a

time, higher hard higher, margin, in let's just a is or XXXX, lane opportunity that market It's ourselves higher to we we if but we the like lane we those that multiples business we that acquisitions. are may slightly in be full like company. say, medical are public an justifying those like our to for have maybe over We did businesses. a and as EMS, like traditional acquisitions commanding We DCMS our EMS you traditional have over a from areas than or multiple think that a The do back go than command the multiples half space, a there average. businesses the a

those to so priority. be continue a And will

want our all strategy on of what acquired of here, think, we In our we've I we We of GES. we of there. want to and sure, terms put platform sure, efforts integration benefit test out full measurement the automation new hit make make and to

GES synergies do when those, acquisition. tuck-in strategy, certainly what develop -- we'll So bolt-on platform Hardware a yes, within contained further there and do the out on the got all we like think would entities in a look asset. a it's we our business, GES business, things we business new but is have of we lot a lot software service bring the to We here. that do of acquisition work grow really to and that hardware acquired or at so to we we got can this

Richard Greenberg

Okay, okay.

the made, peaky. they talking was mobility Just -- it the know and acquisition of semi-equipment -- kind business the like kind also about semi-equipment business of to well. we've as But rings and now familiar don't is I really Celestica

Celestica did have overpaid to bit just guys just a I may it of you overpaid kind be little for the may their acquisition? a like question, seems cycle me So mistimed and

Donald Charron

a downward device, This hardware, the this, term they you Richard. but cycles in I liked a in for but really software long Again, smart service at these perfect GES. on a Well, know time are we're paper, saw predictable and thought at hard us the areas it say and to just ourselves been to at we really looking find cycle, But place. being synergies in the definitely downward think target, you pad build But medium- I creation as have cycle. to Both for really are to spent look it's the in don't aspects I -- which shareholder that one what semi we for well, we years had are maybe own all cycle. of were it in hard overpaid business as longer-term. get a value we as looking passed, right. but in and launching the we those that's or lot it. yes, on deep mean, we somewhere in long-term low as and that bought mobile if a maybe don't long you in those would here our really factories of the we helped case as us want We money was season

profitable and I think this we up to company. growth paid out a true up it's scale generate to think fair value get the and make synergies for it and our I the for business, now of management us successful, it, as

Operator

over Charron And to remarks. call [Operator back the Instructions]. now would Mr. any for further I turn like to

Donald Charron

to and speaking the That you Thank appreciate interest you, today's to day. next you, our forward of end great a call. have look your brings We and Josh. Thank on call. us with

Operator

to may At up disconnect you, this Thank day. the hang and call. a nice from have listeners, you time, simply

Kimball Electronics (KE) 8 Feb 192019 Q2 Earnings call transcript