Kimball Electronics, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights:

• Ric Phillips: Proud of Q3 results, sales in line with expectations, margin improvement, cash generation, debt paydown, and new Indianapolis facility for medical CMO. Discussed tariff uncertainty and supply chain considerations.
• Jana Croom: Reviewed financial results, including net sales, gross margin, adjusted selling and administrative expense, adjusted operating income, balance sheet details, and reiterated fiscal 2025 guidance.
• Ric Phillips: Reiterated company repositioning efforts like divesting AT&M, closing Tampa facility, cost reductions, and inventory/cash flow improvements

Segment Performance:

• Medical: Net sales in Q3 were $115 million, accounting for 31% of total company sales. The increase was driven by non-recurring consignment inventory sales to a large medical customer.
• Automotive: Largest business with net sales of $173 million, 46% of total company. Decreased 14% YOY, concentrated in North America and China, with growth in Europe but decline in North America.
• Industrial: Net sales of $86 million, 23% of total company. Decreased 15% YOY, with largest decline in Europe

Guidance:

• Reiterated fiscal 2025 guidance: net sales range $1.4 billion to $144 billion, adjusted operating income 3.4% to 3.6% of net sales, capital expenditures $40 million to $50 million. Expect to be at high end of sales and adjusted operating income range.
• Tampa facility exit costs range $6.5 million to $8.5 million, proceeds from sale expected to exceed exit costs

Risks:

• Tariff environment uncertainty impacting business, customers, and end consumers. Potential impacts on supply chain and U.S. manufacturing

Q: Could you give us some more details about this strategy with this new larger facility in Indianapolis? Like what does this do to fixed costs given the lease, any additional equipment you might buy or labor? And, I guess the second part to that is what might the owned facility that you would transfer over time be worth if you were to be able to sell that?

A: Ric says the new facility gives more space for medical CMO, it's a lease with favorable terms. Jana adds on lease terms and no immediate labor costs. Steve Korn says it's too early to tell on existing facility sale value Q: Hey, guys. Thanks for taking my questions. Congrats on the strong March. Just looking at the results here, do you think any orders were pulled into March just given the backdrop?

A: Ric says no strong indications of order pull forward ahead of tariffs, but monitoring customers daily Q: Hey, guys. Thanks for taking my questions. Congrats on the strong March. Just looking at the results here, do you think any orders were pulled into March just given the backdrop?

A: Ric says no strong indications of order pull forward ahead of tariffs, but monitoring customers daily Q: Hey, guys. Thanks for taking my questions. Congrats on the strong March. Just looking at the results here, do you think any orders were pulled into March just given the backdrop?

A: Ric says no strong indications of order pull forward ahead of tariffs, but monitoring customers daily Q: Hey, Jaeson Schmidt from Lake Street Capital. Just looking at the results here, do you think any orders were pulled into March just given the backdrop?

A: Ric says no strong indications of order pull forward ahead of tariffs, but monitoring customers daily Q: Next question from Jaeson Schmidt: And then just looking at sort of the first month of Q4, curious what you're seeing from kind of a quoting activity and booking standpoint?

A: Ric says seeing good trend, cautious but seeing pockets of strength, funnel is healthy Q: Next question from Jaeson Schmidt: And then last one from me and I'll jump back into queue. Apologize if I missed this, but how should we think about OpEx trending the rest of this calendar year?

A: Jana Croom says SG&A this year is low, but in FY 2026 will need to invest for growth, 3% level not sustainable long term Q: Next question from Derek Soderberg: Hey, thanks for taking the questions. Hey, Jana. Sorry, I think you kind of broke up there. But, so Jana, just kind of continuing the conversation on us taking a modeling approach here looking forward. I think just in the short term, it looks like we're going to have a step down in gross margin, operating income percentage. I'm guessing that's tariffs. I think the math works out to maybe 2% operating income margin for the last quarter here. Is that right? And can you just kind of talk about the short-term moves in gross margin operating income, things like that and then how we should think about those pieces for next fiscal year?

A: Jana Croom says next quarter expected to be similar to Q3, model expectation similar to this quarter, restructuring impacts taking hold Q: Next question from Derek Soderberg: And as my follow-up just on the Indianapolis facility, Ric, just curious why you feel like this was the right time to make this move? Can you just touch on the demand environment in Medical? And then beyond sort of this more inorganic move, does this at all change the approach to inorganic growth from here? Can you just kind of talk about you've got this facility now, does that at all change how you approach inorganic growth in the Medical space?

A: Ric says Medical CMO is an attractive space, current Indianapolis facility can't handle new big business, made investment, continue to look at inorganic opportunities Q: Next question from Derek Soderberg: And then just one last one for me. Jana, continue to manage the balance sheet well here. Any more room to work with inventory management? And then just can you kind of touch on the cash conversion here? Where do you think that's going to be trending here? And then finally, just on buybacks, it sounds like you've got about $20 million left. Do you feel like you guys are in a position to continue to repurchase shares here?

A: Jana Croom says expect to continue share repurchase program, cash conversion days still room to improve, work to be done in PDSOH, DSO, AP days parity Q: Next question from Anja Soderstrom: Hi. Thank you for taking my questions. Most of them have been addressed already. But when are you going to lapse that steering program fall off in the auto vertical?

A: Steve Korn says major breaking program referred to will be complete by end of this quarter, new breaking program launched in Romania is solid Q: Next question from Anja Soderstrom: And then you're ramping some other programs right so we should start seeing an increase.

A: Steve Korn says yes, new breaking program in Romania is solid, other programs launching Q: Next question from Anja Soderstrom: And with you closing the Tampa facility and moving some of that production to other facilities and now you're opening another facility and going to move, how is that going to affect your gross margin going forward and when do you expect that to sort of normalize?

A: Steve Korn says Tampa closure on track, expect gross margin improvement, Indy facility move has small impact, navigating tariff pressures Q: Next question from Anja Soderstrom: And then just one last one in terms of CapEx spend and investments in automation and efficiencies. Do you still have a lot of room there to make improvements there and that could sort of help your utilization and margins?

A: Steve Korn says continue to invest in automation in warehouses and production floors, see opportunities there Q: Next question from Hendi Susanto: Good morning, Ric, Jana and Steve. I would like to ask about automotive first. So your manufacturing footprint in China, like can you compare and contrast how different it is in terms of, let's say, like 70% of your auto business is steering wheel, is that the case in China also? And then, so, like if you look at the high level, what the revenue of -- what the revenue composition of China looks like, how different or how similar it is?

A: Steve Korn says China has higher percentage of steering, closer to 80% in steering across Tier 1 customers and OEMs Q: Next question from Hendi Susanto: May I also ask about the breaking program. Like, would you be able to disclose like how many customers you are working with or and then like how many platforms in terms of design awards?

A: Steve Korn says working with two or three different customers in breaking, can't share much on platforms, same customer in Mexico and Romania Q: Next question from Hendi Susanto: And may I know what type of vehicles?

A: Steve Korn says both ICE and EV vehicles Q: Next question from Hendi Susanto: And then my next question is about the sales trend in industrial, the declines in smart metering, climate controls and public safety products. Have we reached the bottom yet?

A: Steve Korn says believe reached bottom in climate controls, smart metering not significant in future, public safety also reached bottom Q: Next question from Hendi Susanto: And in order to see, let's say, like gross returning in industrials, what are the top low hanging fruits?

A: Steve Korn says current customers, new programs, some new verticals 12-15 months out, charging opportunities with customers Q: Next question from Hendi Susanto: Jana, I would like to understand this better, the consign inventory sale impact, you mentioned the impact was 22% and 6%. I would like to verify my understanding about those two different numbers 22% on like medical and 6%.

A: Jana Croom says 22% impact on medical vertical specifically, 6% on total net sales Q: Next question from Hendi Susanto: And Jana, I would like to understand this better, the consign inventory sale impact, you mentioned the impact was 22% and 6%. I would like to verify my understanding about those two different numbers 22% on like medical and 6%.

A: Jana Croom says 22% impact on medical vertical specifically, 6% on total net sales Q: Next question from Hendi Susanto: And with regard to the Tampa closing, so the estimated exit cost is $6.5 million to $8.5 million. How much has incurred, let's say, like year-to-date? And when will the remainder will the remainder be entirely in the fourth quarter of the current fiscal year?

A: Jana Croom says year-to-date about $3.5 million to $4 million, bulk in next quarter, may carry over to Q1 2026 Q: Next question from Hendi Susanto: And then one last question. I think with regard to let's say ongoing trend of inventory digestion in certain spots whether it is in Industrial or Automotive and now we have uncertainty. Can you highlight where inventory corrections is better today compared to three months ago? And when do you see areas where customers may do inventory rebuild sometime in -- like sometime soon? Some companies are expecting incremental or gradual improvement in the second half. Wondering whether you can share some puts and takes on the inventory digestion that has been ongoing for a while versus when customers may rebuild their inventories?

A: Steve Korn says inventory down $100 million over 12 months, positive trend, burning down LTSA inventory, not seeing significant customer inventory buildup, will monitor Q: Next question from Mike Crawford: Thank you. I just wanted to go back to your guidance to talk about being at the high end of your guidance. I mean that implies like just, I don't know, dollars $335 million of revenue in June, versus what I think Jenny said it was a $23 million consigned inventory sale because that 22% and 6% come to slightly different numbers. One is $25 million one is $22 million but.

A: Jana Croom says it's $24 million consigned inventory sales, demand continues to be strong, will beat guidance