Q4 2024 Kimball Electronics Inc Earnings Call

In This Article:

Participants

Andy Regrut; Treasurer and Investor Relations Officer; Kimball Electronics Inc

Richard Phillips; Chief Executive Officer, Director; Kimball Electronics Inc

Jana Croom; Chief Financial Officer; Kimball Electronics Inc

Mike Crawford; Analyst; B. Riley Securities

Jaeson Schmidt; Analyst; Lake Street Capital Markets, LLC

Derek Soderberg; Analyst; Cantor Fitzgerald & Co.

Anja Soderstrom; Analyst; Sidoti & Company

Hendi Susanto; Analyst; Gabelli Funds

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Kimball Electronics fourth quarter fiscal 2024 earnings conference call. My name is Sherry, and I will be the facilitator for today's call. (Operator Instructions) Today's call, August 14, 2024 is being recorded. (Operator Instructions)
At this time, I would now like to turn the call over to Andy Regrut, Treasurer and Investor Relations Officer. Thank you, Mr. Regrut, you may begin.

Andy Regrut

Thank you, Sherry, and good morning, everyone. Welcome to our fourth quarter conference call. With me here today is Rick Phillips, our Chief Executive Officer; and Jana Croom, Chief Financial Officer. We issued a press release yesterday with our results for the fourth quarter and full fiscal year ended June 30, 2024.
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 risks and uncertainties 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 the forward-looking statements.
Our commentary today will be focused on adjusted non-GAAP results. Reconciliations of GAAP to non-GAAP amounts are available in our press release. This morning, Rick will start the call with a few opening comments, Jana will review the financial results for the quarter and guidance for fiscal 2025, and Rick will complete our prepared remarks before taking your questions.
I'll now turn the call over to Rick.

Richard Phillips

Thanks, Andy, and good morning, everyone. Before I get into Q4 results, I want to briefly touch on the divestiture of the automation test and measurement business. As announced earlier this month, the transaction was finalized on July 31.
While we made significant strides in enhancing capabilities in AT&M since the acquisition of GES in 2018, it was not a good fit for Kimball, and we determined that focusing on core EMS operations aligns best with our strategic priorities and longer-term growth opportunities for the company.
AT&M will be well positioned under its new ownership. I would like to thank the AT&M team for their contributions and wish them success moving forward. Closure on the sale also represents a significant milestone for our company and another important step towards sharpening our strategic focus and returning to profitable growth and stronger performance.
The divestiture was not a small undertaking with many resources invested over the last year. I'd also like to thank the entire Kimball team for the extra effort required in closing the deal and in ensuring the smooth transition, your contributions are greatly appreciated.
The proceeds from the sale of AT&M, combined with the recent improvements in working capital management have strengthened our balance sheet in the form of increased liquidity and financial flexibility. As part of sharpening our strategic focus, we are actively evaluating our mix of revenue and verticals in light of the recent economic conditions.
Present at the forefront is the long-term strategic growth of the company and the need for a balanced portfolio, which is not overly weighted to any particular vertical. We have had significant success in bringing on new medical wins and continue to focus our front end efforts on this space.
Additionally, we continue to be open to acquisition targets such as customer divestitures in the medical space and opportunities to expand in new geographies or capabilities Kimball's not currently have. Now onto Q4, which was another quarter focused on controlling what we can control the operating environment for the EMS industry remains challenged and many contract manufacturing organizations.
Kimball included have adjusted expectations based on continued weakness in end market demand. In the verticals we serve the pullback has been more significant than originally anticipated. And we continue to maintain competitiveness by appropriately adjusting our cost structure to stabilize operating margins and purposefully drive inventory levels lower to generate positive free cash flow.
Our long-term customer funnel remains strong for the future. Net sales in the fourth quarter totaled $430 million. While this was in line with our expectations and represents a $5 million or 1% increase sequentially over Q3, it was a 13% decrease compared to the same period last year.
As a reminder, Q4 last year was a record for the company as we grew 33%. So the year-over-year comparison was steep. The decline this year occurred in all verticals in each region of our global footprint. Starting with automotive, our largest business net sales were $212 million, a 7% decrease compared to Q4 last year and 49% of total company sales.
The decline was in line with the softness we outlined in May and contributed to a 2% decrease in revenue in this vertical for the full year. As we have stated many times our focus in automotive is heavily concentrated on chassis control applications that is steering, braking and suspension ECUs.
Electronic braking is a relatively new growth opportunity. We started manufacturing these systems in Reynosa, Mexico a few years ago. Unfortunately, in late Q4, this program experienced a setback. We learned that the Tier 1 customers no longer going to produce the system for the OEM.
While this development did not directly impact our financial results in the quarter, and it did not occur due to Kimball related issues such as workmanship quality or our ability to produce product. It does affect our outlook for the automotive vertical in fiscal '25.
Our relationship with this customer has never been better. In fact, we will launch a new braking program for them in January 2025 in Romania. We are also collaborating on additional opportunities to backfill the lost volumes.
Turning to Medical, where net sales in Q4 totaled $102 million, a 17% decrease compared to the same period last year and 24% of the total company. Once again, the decline was primarily driven by the lost revenue associated with our customer involved in an FDA recall.
As a reminder, our annual guidance assumed a net $50 million reduction in medical sales or down 10% compared to the prior year. This consisted of a $100 million decrease from the recall, partially offset by $50 million of growth from new and existing programs.
The final result for the medical vertical in fiscal 2024 was a decline of 15%. As we look forward, we're very encouraged by the growth prospects in this vertical market with our focus on higher level assemblies and finished medical device opportunities.
As an example, we were recently awarded the transfer of work as the sole supplier of respiratory care, final assembly and HLAs business for our largest medical customer. This transfer is expected to commence in calendar 2025 with production impacting our fiscal 2026 results.
In addition, we see our expertise in manufacturing selected drug devices such as autoinjectors as a differentiator and an overall very attractive market. And we continue to focus significant business development resources in this space and are very encouraged about future customer opportunities as a result of those efforts.
Finally, industrial with net sales of $116 million, down 19% compared to the fourth quarter last year, and 27% of total company sales. Results for the AT&M business are included in this vertical and approximately one-half of the decline in sales and industrial resulted from year over year weakness in the AT&M business with the balance driven by lower demand for internal climate control systems and smart meters in Europe, which have been commoditizing.
For fiscal 2024. In total, the industrial vertical declined 3%, which was in line with our estimates. Longer term, we see a return to growth coming from a market rebound for climate control products and diversification into other sub-verticals within the industrial space.
This may include increased demand for factory automation and green energy, resulting from the megatrend of raising consumer awareness on consumption of natural resources. We are also in the early stages of exploring the off-highway equipment market.
In closing, I'm proud of the resilience demonstrated by our team in the fourth quarter and fiscal 2024. We believe we're uniquely positioned to capitalize on the various opportunities within the EMS space and that our sharpened strategic focus is setting us up for longer-term growth, particularly as the operating environment normalizes.
I'll now turn the call over to Jana to review Q4 in more detail and outline our guidance for fiscal 2025. Jana?