Good morning, ladies and gentlemen. My name is Michelle, 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 2021 Financial Results Conference Call. All lines have been placed on to listen only mode to prevent any background noise. After the Kimbell speakers' opening remarks, there will be a question and answer period where Kimbell will respond to questions from analysts can ask questions during the question and answer segment by simply pressing star and the number one on your telephone keypad.
To take questions from the operator. Today's call, February 4, 2021, will be recorded and may contain forward looking statements as defined under the Private Securities Litigation Reform Act of 1995. Risk Factors may to influence the outcome of forward looking statements can be seen in Kimball's Annual Report on Form 10 ks for the year ended June 30th 2020 and in today's release. The panel for today's call is Don Charron, Chairman of the Board and Chief Executive Officer and Mike Sergejes Gitter, Vice President and Chief Financial Officer of Kimball Electronics. I would now like to turn today's the call over to Don Sheridan.
Mr. Sharon, you may begin.
Thank you, Michelle, and welcome, everyone, to our Q2 conference call. To turn the call over to Mr. President. Our earnings release was issued yesterday afternoon on the results of our Q2 ended December 31, 2020. To turn the call over to Mr.
President. We have posted a financial summary presentation to accompany this conference call, which can be found on our Investor Relations website within the Events and Presentations tab. To begin by reviewing the slides or download them from the Downloads tab on the webcast portal. To turn the call over to Mike for the financial overview. After that, we will answer any questions that you may have.
We are very pleased with the operating results for the Q2 of fiscal year 2021. To turn the call over to Mr. President. We again exceeded our goal of 4.5 percent operating income, and we continue to deliver excellent cash flow from operations. To turn the call over to Eric.
Our strong results were primarily driven by improved operating execution, favorable product mix and a weaker dollar. Looking ahead, we expect that our performance should approximate our long stated goal of 4.5% operating income. To turn the call over to Eric. The persistence of the pandemic continues to draw our attention. It's difficult to predict what we will face in the future.
To turn the call over to Bob. However, we are confident that our business will remain strong, and we are optimistic about our new business opportunities funnel. To turn the call over to our call. We remain committed to our goal of 8% organic growth and believe the goal is well within our reach for fiscal year 2021. Our team remains resilient, and I'm so proud of our collective response to the adversity, while generating strong cash flow to turn the call over to Steve to discuss our financial results.
Beyond our excellent financial results, we never lost sight of the fact that the health to thank our employees for their continued support and support. We continue to make every effort to keep our facilities safe. To turn the call over to Mr. President. The number of our employees testing positive for COVID-nineteen has been kept at a low level and disruptions have been kept to a minimum, to turn the call over to Steve to discuss our financial results.
Thank you, Steve. Thank you, Steve. Thank you, Steve. Good morning, everyone. To turn the call over to the Q2 of fiscal year 2020, but were down 31% sequentially.
To turn the call over to Mr. President. As the COVID-nineteen related increases in the previous quarters were completed and our sales in our medical vertical normalized and began to approximate pre COVID-nineteen run rates to turn the call over to our financials and financials. To turn the call over to Mr. President.
We expect the sales in our automotive vertical will remain at these levels or even steadily increase throughout the remainder of fiscal year 2021. To turn the call over to Mr. President. We are, however, keeping a close eye on the industry wide semiconductor shortages and the potential impact on global automotive production. October 1, 2020, marked the 2 year anniversary of our GES acquisition.
To turn the call over to Mr. President. The GES results for the Q2 of fiscal year 2021 were again a significant improvement when compared to the Q2 of fiscal year 2020. To It is important to note that we do have a degree of seasonality in the GES business. To turn the call over to Mr.
President. Thank you, Mr. President. Thank you, Mr. President.
Thank you, Mr. President. Thank you, Mr. President. To be shipped in the Q4 of fiscal year 2021 has grown nicely and GES is well positioned to deliver those machines as scheduled.
To turn the call over to our operator. Our cash conversion days or CCD for the quarter ended December 31, 2020 were 75 days, to turn the call back over to the operator for the Q1 ended December 31, 2019, and the Q1 of fiscal year 2021. In the Q2, a significant decrease in our production days supply on hand or PDSOH to turn the call over to our operator for the Q1 of 2019. While the volatility in demand and product mix to turn the call over to Steve to discuss our cash conversion days objectives. We are encouraged by our inventory reductions this quarter to reiterate our financial results and remain committed to our goals and actions.
We will continue to focus on optimizing our working capital and achieving our CCD to turn the call over to
our next question and answer session.
We invested $6,100,000 in capital expenditures in the Q2 of fiscal year 2021. To turn the call
over to Mr. President. These capital investments were largely to support the launch and ramp
up of new programs and to replace older machinery and equipment. To turn the call over to Mr. President. We continue to study our capacity needs to support growth plans. The Board approved plan to expand our Thailand operation has been officially kicked off to turn the call over to Mr.
President and CEO. There were 190,000 shares repurchased to conduct a question and answer session. I will now turn the call over to Mr. President for a total of $3,000,000 Since October of 2015, under our Board authorized to share repurchase program. A total of $79,700,000 was returned to our share owners to turn the call over to Bob for questions.
Thank you, Bob. And lastly, as I stated earlier, I'm so proud of our people to turn the call over to our operator to discuss our financial results. Thank you, Steve. Thank you, Steve. Thank you, Steve.
Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.
Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.
Thank you, Steve. Thank you, Steve. To turn the call over to Eric. Our number one priority will continue to be keeping our employees healthy and safe. We will continue to deliver on our promises to our customers.
To turn the call over to Mike. With our strong cash flow and balance sheet, the company is in a solid position, and we are committed to build success in the future. To turn the call over to Mike to discuss our Q2 results in more detail. We will then open the call to your questions. Mike?
To turn the call over to Mr. President. Thanks, Don. During my comments, I'll be referring to the slide deck Don mentioned, which can be found on our Investor Relations website within the Events and Presentations tab. To Or if you're listening via the webcast, you can follow along by advancing the slides on the webcast portal.
As shown on Slide 3, to turn the call over to our operator. Our second quarter net sales were $320,600,000 which was a 4% increase compared to net sales of 307 to introduce volumes in the automotive vertical. Foreign exchange rates favorably impacted our net sales 3% compared to the Q2 a year ago. To Slide 4 represents our net sales mix by vertical market. Our automotive vertical was up 13% compared to the same quarter a year ago to turn the call over to John.
And up 28% sequentially, driven largely by the ramp up of certain programs, including programs for fully electric vehicles to conclude our prepared remarks with the continued recovery from the COVID-nineteen shutdowns, lower volumes in the prior year due to the UAW strike to take a look at the financial
results and favorable foreign exchange
rate impacts. Our medical vertical was up 2% in the current quarter compared to the prior year 2nd quarter. To turn the call over to Eric. As expected, sales in the medical vertical normalized in the second quarter as the COVID-nineteen related increases to take a look at the numbers that
we have experienced in the most recent
two quarters were completed, and our medical vertical began to approximate pre COVID-nineteen run rate. To turn the call over to Steve. Our industrial vertical was up 2% from a year ago, primarily due to improved sales of automation, test and inspection equipment to turn the call over to Eric to discuss our financial results
and higher end market demand
for climate control products, which were partially offset by decreased demand for smart metering products. To turn the call over to the operator. Lastly, our public safety vertical sales were $10,500,000 which were down 28% from the prior year's Q2, to turn the call over to Eric. Gross margin improvement compared to the prior year Q2 was driven by a number of factors, including improved operating execution, to turn the call over to David. Thank you, David.
Thank you, David.
Thank you, David. Thank you, David. Thank you, David. Thank you, David. Thank you, David.
Thank you, David. Thank you, David.
Thank you, David. Thank you, David. Thank you, David. Thank you, David. Thank you, David.
To note that favorable foreign currency impacts driven by the weaker dollar and continued year over year GES operating improvements, to turn the call over to Steve to discuss our financial results, which were partially offset by higher profit sharing bonus expense. Adjusted selling and administrative expenses, non GAAP, to turn the call over to
the operator for questions. Thank you, Jim. Thank you, Jim. Thank you, Jim. Thank you, Jim.
Thank you, Jim. Thank you, Jim. Thank you, Jim. Thank you, Jim. Thank you, Jim.
Thank you, Jim. Thank you, Jim. Thank you, Jim. Good morning, everyone. Good morning, everyone.
To turn the call over to Eric. The increase in adjusted selling and administrative absolute dollars was primarily driven by higher profit sharing bonus expense, Adjusted operating income non GAAP for the 2nd quarter came in at $17,000,000 or 5.3 percent of net sales. To turn the call over to Mr. President. And as shown on Slide 7 in the deck, an improvement from $9,200,000 or 3 percent of net sales in the same period a year ago, to turn the call over to Jim.
Thank you, Jim. Thank you, Jim. Thank you, Jim. Thank you, Jim. Thank you, Jim.
Thank you, Jim.
Thank you, Jim. Thank you, Jim. Thank you, Jim. Good morning, everyone. Other income expense was income of $2,400,000 in the 2nd quarter, which compares to income of $100,000 in the to turn the call over to the Q2 of fiscal year 2020.
Other income net in the current year's Q2 includes $2,500,000 in net foreign currency gains, to Other income net in the prior year Q2 includes $1,100,000 in interest expense, to turn the call over to our operator to discuss our financial results. The effective tax rate for the current year 2nd quarter was approximately 19%. The current period effective tax rate was to turn the call over to Mr. Chairman.
Thank you, operator. Thank you, operator.
Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator.
Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator. To turn the call over to Mr.
President. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.
Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Good morning, everyone.
Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone.
Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone.
To turn the call over to Eric. Our net income in the Q2 of fiscal year 2021 came in at $15,100,000 to turn the call over to Mr. President with adjusted net income non GAAP of $15,200,000 after adjusting for the after tax impacts of to discuss the settlement charges after the measurement period on the GES acquisition. This compares to net income of 6 point to turn the call over to Mr. President of the Company's Q2 of fiscal year 2020.
There were no non GAAP adjustments in the Q2 of fiscal year 2020. To turn the call over to David. Diluted earnings per share in the current Q2 was $0.60 This compares to diluted earnings per share of 0.2 to provide an update on the financial results. At this time, I would like to turn the call
back over to Tom. Thanks, Chris.
Thank you, Chris. Thank you, Chris. Thank you, Chris. Thank you, Chris. Thank you, Chris.
Good morning, everyone.
To turn the call over to Eric.
Cash and cash equivalents at December 31, 2020, were $93,600,000 to turn the call over to Bob. Operating cash flow trends are shown on Slide 11. Our cash flow provided by operating activities during the fiscal year Q2 was 51 point to turn the call over to Eric to discuss our financial results. In the prior year Q2, operating activities used $300,000 Our cash conversion days, or CCD, was down one day to turn the call over to Mr. President from the 3 months ended December 31, 2020, when compared to both the same period in the prior year and the Q1 of fiscal year 20 to turn the call over to the operator for the Q2.
In the Q2, a significant decrease in our production days supply on hand, our PDSOH, our inventory measure, to turn the call over to Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.
Thank you, Steve. Thank you, Steve. Thank you, Steve.
Thank you, Steve. Thank you, Steve. Good morning, everyone. Good morning, Steve. Good morning, Steve.
Good morning, everyone.
Good morning, everyone. To turn the call over to Mr. President. Capital investments in the 2nd quarter totaled $6,100,000 largely related to manufacturing to turn the call over to the operator for questions. The Board approved expansion of our Thailand operation has been officially kicked to turn the call over to John, as Don mentioned, which will double the capacity of the Thailand facility and is expected to take approximately 12 months to complete at a cost of $8,000,000 to Borrowings on our credit facilities at December 31, 2020, were $86,000,000 to turn the call over to Mr.
President, which is down $32,000,000 from June 30, 2020. Our borrowings classified as long term have declined to provide $30,500,000 from June 30, 2020. Our short term liquidity available represented to turn
the call over to our financial results.
Our cash and cash equivalents, plus the unused amount of our credit facilities, totaled $205,000,000 at December 31, 2020. To turn the call over to Tom. In conclusion, our financial condition continues to be strong, and we're in an excellent position to take advantage of growth opportunities to turn on invested capital, while being able to confront the continued uncertainties to turn the call back to the operator for questions. With that, I would like to open up today's call to questions from the analysts. To Michelle, do we have any analysts with questions in the queue?
Up your handset before asking your question. One moment for questions. Our first question comes from the line of Mike Morales with Walt House and Company. Your line is open. Please go ahead.
Hey, good morning, Don and Mike. Hope you're all staying safe and well. Likewise, Mike. Hey, guys. A few questions to touch on here.
Let's start with the supply chain and to pass the expansions that you guys talked about. You called out the semiconductor shortages that you're seeing, to Specifically as it relates to auto, can you just give a broad update on what you're seeing from the supply chain? And thinking about to discuss specifically semiconductors. If we're searching for a silver lining here, could that help the GES business, as people to add capacity in that space. Just curious on what you're seeing.
Yes. So let's start with that, the last part of your question around to discuss GES and could it help our business outlook medium to longer term for GES? The short answer is yes. To take a question from the line of John. That's one of the end market verticals that our GES business focuses on, and we do have quite a bit of to take a look at the next question and answer session.
Thank you. Thank you. Thank you.
Thank you. Thank you. Thank you. Thank you. Thank you.
Our next question comes from the line of to turn the call over to the overall adds capacity. Coming to the shortage situation that we're facing now, it's really difficult to say whether or not it truly is a capacity issue or that it's more COVID-nineteen impacted and that maybe the system just got a little out of balance. If you think about, what we've all been through last March or in the spring timeframe, to turn the call back over to Tom. When the pandemic settled in and we started the whole stay at home IT surge to take a look at the products took off and of course, it consumed a lot of those same semiconductors, whether it was to stay at home for work or for learning or stay at home for entertainment. All those products consumed to consume the same type of semiconductors that are now showing up as shortages in the auto sector.
And Will that continue? Certainly, there's a rebalancing. We had a shutdown to turn the call over to Eric to speak with you. Within automotive in North America and Europe that lasted approximately 6 weeks. And during that time, those other products I mentioned were surging.
And to So it definitely was the catalyst for this sort of rebalancing issue we have right now. That being said, we are experiencing to turn the call over to the operator for questions. Thank you. Thank you. Thank you.
Thank you. Thank you. Thank you. To turn the call over to Eric. As we said, we're watching that very closely.
We're thinking that it's going to be with us for a quarter or 2 to take a look at the next question and answer session. Before things kind of catch up and get rebalanced, that being said, we're in a pretty good position to try to mitigate to take a look at the numbers and the last point I would make is the automakers are already having to set to take the next question and answer session. And of course, they set those priorities on the most popular and profitable vehicles in their fleet. To And I would I think we believe that our the vehicles that where we have content would be at to turn the call over to Eric.
We're near the top of that list for many of those
vehicle manufacturers. So we're hopeful that we will gain priority with those vehicle to thank the manufacturers and those allocations were made and our production will be less impacted maybe than it otherwise would. And so but we're keeping a close eye on it, It's developing and it's really, I think, started to manifest itself in the last 60 days. So it's pretty early, But we're keeping a very close eye on it and taking as many countermeasures as we can to mitigate the risk.
Understood, understood. And taking what you guys had talked about with the auto remaining at this level or even higher moving forward, that incorporates the supply chain
That's right. That's right.
Got it. Got it. That's helpful. I'd like to take a second to commend you guys on really the eye popping to cash flow this quarter, really, really strong performance there. I'd like to dig into it a little bit and maybe to help me understand, I guess the sustainability of this.
Certainly to see the balance sheet and net cash position now is Really good. And thinking about moving forward, maybe we're not getting to this level every quarter, but relative to history, how would you guys to frame the work that you guys have done on working capital and cash flow moving forward.
Yes. Well, thank you to thank you for
your kind words.
We've been working on it for quite a while, especially the working capital part of that and especially the inventory. To I think if you go back 6 or 8 quarters, we started to add inventory due to shortages at that time that were more related to to turn the call back over to the operator. We felt like we needed a buffer with more inventory, and we build up inventory to a point where it was definitely noticeable on the negative side. To take a look at the numbers and we've been working that down and sort of at times it felt like one step forward, 2 steps back, but we kept our shoulder into it, kept our focus on it to turn the call over to Steve. Thank you.
Thank you. Thank you. Thank you. Thank you. Thank you.
Thank you. Thank you. Thank you. Our Our days sales outstanding moved up a bit, and we're working that pretty hard as well in to make sure we get paid on time from all of our customers. And so the inventory efforts, I would say, will continue.
We're not at our goals to turn the call over to Steve. Yes, we're making good progress, but we're not at our goals. So we're going to continue to work on inventory and inventory reduction initiatives. To That should help us make some more improvements there in the whole cash conversion cycle. And of course, our operating activities without working to take a look at the numbers and look at the numbers and look at the numbers and look at the numbers and
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look at the numbers and look
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look at the numbers and
look at the numbers and look at the numbers and look at the numbers and look at the numbers and look at the numbers and to take your questions. Obviously, best of all time for us, but we do expect to continue with strong cash flow going forward.
That's helpful. That's helpful. And then last for me, taking all of that on the cash flow and the work that you're continuing to do. To turn into capital deployment. Any updates that you can give on just how you're thinking about capital allocation?
I know acquisitions, to specifically on the medical side, it's been expensive recently. Are you guys seeing anything related to maybe to take a look at COVID related demand tapering off, resulting in some multiples coming down to make things more attractive or Is that not really taking place so far and is share repurchases and other uses of capital most likely deployment?
Well, for sure, to Mike, we're going to keep the number one priority on organic growth. We talked about the Thailand expansion and we have others under review. To We do and as I said in my comments, we're optimistic about our new opportunities funnel. To And when we look at our footprint, we've got some facilities that are reaching full capacity to take a look at the numbers from a square footage standpoint. And so our strategy there is to expand where we are and to take a look at the future.
We've modeled total greenfields compared to expansions of existing operations, and it's much more favorable, to be less dilutive to expand an operation where we're operating than to do a full greenfield like we did with Romania. But we are looking at not I mean, obviously, the Board approved Thailand to turn the call back over to Tom. And then we've officially kicked that off and we're looking
at other
operations that we'll need to make a capital allocation to take a look at the next question and answer session. I would like to ask you a question and answer session. Thank you. Thank you. Thank you.
Thank you. Thank you. Thank you. Thank you. Thank you.
Our next question comes from the line of to ask questions in the medical space, support our diversified contract manufacturing strategy. They're tough to find. To And answer your question, I think what we would say, if they've not been COVID-nineteen impacted, they're interested and to take your questions. Their name is in the market and the multiples are high. If they have been COVID-nineteen impacted, a lot of those targets are just coming off to take a look at the market and just not talking.
And so it's been a challenge to find targets. We're obviously active, have been active looking at targets
to take a look at the
outlook for the Q1 and looking for targets. So that's still on our list, but it's been tough. It's been difficult in this market to find something that really works for us. We restarted the share repurchase program this past quarter. That's certainly on the allocation list.
And so, yes, number one priority is making sure we've allocated capital to support our organic growth. That's number 1.
Understood, understood. Guys, I appreciate the color as always. I hope you folks would be well.
Likewise, Mike. Take care.
Thank you. And our next question comes from the line of Andrea Soderstrom with Sidoti. Your line is open. Please go ahead.
Hi, thank you for taking my question and congratulations on another great quarter and good questions asked already. But if we can just expand a little bit about to turn the call back over to the operator. Okay. Thank you. On the capacity comments, where do you stand now in terms of capacity?
And what kind of ability to have to expand the existing ones until those are fully expanded and you need to go into a greenfield?
Most of our locations like Thailand, we had, let's say, land to be very near by our existing facility that's available for expansion. To take a look at the numbers. And so the good news is, is we have the capability to expand the majority of our facilities and literally to do that expansion right next door, so to speak. And so that provides a lot of synergy, especially around cost management and leveraging to continue to expand the facility physically. So that's the to The reason why we're focused on that particular strategy for expansion, in terms of our to take your questions and how full each one is.
I would say, obviously, we made the decision to expand Thailand, so that was pretty full. To And with more business coming, we were at the tipping point and that's why we move forward with that expansion. Next on our list, to thank our Mexico facility has also been a very popular operation growing. And so we're looking very closely there in terms to take a look at the numbers of expansion to add more capacity. And I would say after that,
to take a look at the future. There's a time where we feel like
where those expansions will cover us and handle our organic growth given the available floor space we have elsewhere in our footprint.
Okay. Thank you. That was helpful. And also you expect the auto to continue to be elevated For the rest of the year, do you see that continue into next year? And is that the new normal or?
Well, the thing I would want you to think about is that, the whole COVID-nineteen pandemic has reduced inventory levels,
to turn the call back to the operator for questions. Especially in the U. S, but really
globally inventory levels have been low. And so getting caught back up, if you will, catching back up to what would be considered normal inventory levels will provide a boost that won't carry on. It will take to We think it would take 3 quarters or so, yet for us to build up as a to provide a collective value chain to build back up those finished goods where carmakers are more comfortable to have them. To turn the call over to Eric.
Now it may take
a little longer depending on the semiconductor shortage and how it impacts how fast those inventories can be replenished. But The auto analysts around the world are very bullish about the buyers returning to the market to
take a look
at the numbers and low inventories driving growth for the foreseeable future. So short term, we'll have a little boost getting the inventories back to normal, but And it will that growth, we would guess, would subside a little once inventories reach the normal levels. But I think overall, there's still to make sure that the industry will grow nicely in the years to come.
Okay. So it's safe to assume that your remarks will hold off for the rest of the year?
You were breaking up a little, to ask that question again?
Yes. I just want to grasp my head about your around your gross margins the performance then. It seems like that will be holding up throughout the year as well then.
Well, certainly the operational improvements to make sure that we made and when you look at the advancements we've made in terms around execution, our supply chain initiatives, our Lean 6 Sigma projects, to turn the call back over to Steve.
Yes, we expect
those improvements to carry forward. Some of the other sort of favorable tailwinds that we mentioned today, those are to reiterate that we could expect in the future. We talked about the fact that we know to take a question from the
line of Chris with the weaker dollar that helps us a little
and we also know we had some benefit from mix, especially higher volumes on mature production lines. To turn the call over to Eric. Those are a little more difficult to project going forward, but certainly we expect the operational improvements that we made to continue with us and continue to reflect in our gross margin and operating income margins.
Okay. Thank you. And then lastly, you mentioned you feel confident in reaching your at least reaching 8% year over year revenue growth targets for this fiscal year, but how do you see that play out in the coming year?
Well, certainly, we're going to benefit this year to turn the call over to Steve with some softer comparables in Q3 and Q4. In the first half of fiscal year 'twenty one, our growth is in the low single digits to take double digit numbers in the second half to reach 8 for the full year. To take your questions. So, as we look forward beyond FY 2021, there's a lot of factors that to we have to sort of settle in on before we could say that we would be confident that our 8% organic growth would be to reiterate that our 8% organic growth goal would be within our reach for FY 'twenty two. We feel confident to say that about to take a look
at FY 2021.
Okay. Thank you. And that was all from me. Thank you so much.
Thank you, Anja.
Thank you. And our next question comes from the line of Hendi Susanto with Gabelli Funds. Your line is open. Please go ahead.
Good morning, Dong and Mike.
Hello, Hendi. Hello.
Hi. Dong, how should we think about growth to take your questions. Of your automotive business, some companies tie their growth metric to unit growth and content growth. And then secondly, how much exposure do you have to EV?
Yes. So Definitely, Hendi, we when we look at our growth and our projected growth, we're looking at our content And what those vehicles are expected to do in their respective markets. And then we, of course, add
to take a look at the new
business that we've won that will be ramping up and of course have to subtract off some programs that will go end of life. So we're doing all that math when we come up with what we think our automotive growth number to be. So it's definitely not a SARS kind of approach. It's more complicated than that, in terms of to continue to be determining our growth. And as you know, automotive has been a real significant part of our growth over the last several years.
And so we continue to be successful in that end market with our value proposition. We continue to win new business. To And so we continue to be optimistic about the automotive vertical. There are obviously a lot of disruptions to turn the call over to Eric to discuss the financial results. Thank you.
Thank you. Thank you. Thank you. Thank you. Thank you.
Thank you. Thank you. Thank you. Our next question comes from the line of to reiterate that the company has taken a step back in this pandemic, but there are disruptions coming. And so it's important to keep an eye on that as well.
And there, our automotive strategy has been focused around to take a look at the future, maybe because their architecture doesn't change to take a look at the numbers that we have in the past about the fact that we support electronic power steering. To take your questions. That application and that architecture is largely the same for electric vehicle as it is for an internal combustion engine vehicle. To take a look at the future. And we have other applications are similar in terms of our approach and our focus.
We have been successful winning content to But it has been a significant part of our growth story in automotive. We're producing to take a look at the numbers that go on fully electric vehicles for some of the most popular brands in the world through this to take a closer look at customer relationship and we have a very strong relationship with them. And so we expect to continue to grow that relationship and it's becoming The amount of our business that is actually on fully electric vehicles is becoming a significant part of our overall
to Got it. And then Don, in industrials, what are some exciting growth opportunities that you to see for 2021.
Well, I like what we're seeing on the climate control side of our business. And I to turn the call back over to Steve. We're seeing that part of our industrial vertical show some promising growth and recovering quite nicely. To take a look at the numbers and we've got some really successful customers in that space. So I'm looking forward to seeing how that business ramps up As we go into the, let's say, higher part of the season for those climate controls, especially here in the U.
S. For HVAC type applications, I like what we're seeing now in terms of traction with GES. As I mentioned, we've to turn the call over to Steve. Got some seasonality there that we're working to grow and diversify our way out of. But at the moment, we have some seasonality there.
But to turn the call over to Steve. We are seeing some nice traction around new orders for new machines and we've got some really interesting developments going on there to take a look at the numbers within that business, which again we report those sales in our industrial vertical. So those are a couple of areas that I'm excited about. To Yes, I remain very excited about smart, metering. I think the pandemic to reiterate that the future growth there.
To turn the call over to Mr. President. We have a number of customers in that space that are market leaders. And when that market starts to to recover from the pandemic and again the restrictions and conditions especially around installation. I believe that will grow again for us to be a significant part of our to go vertical growth story.
And Donna and Mike, if you look back at medical, is there
a way to
quantify to review the one time, let's say, like tailwind of COVID-nineteen in Q1. If I look and compare to Q1 2021 with the prior year, The delta is about like $26,000,000 Is that the right way to try to quantify that?
Well, I think that would get you close, Hendi. It would get you close if you looked at sort of an average run rate and then look at those 2 quarters that to take a look at the effect from COVID-nineteen that would also be showing up. So you're looking at to take a look at the numbers that we have in place, we have a number of quarters that to turn the call over to Steve. We still have parts of our medical vertical that are down to take a question from where we would expect them to be and it's really more related to the fact that they're either to be clear. Not critical or can wait in the whole care continuum to take a look at the numbers, with the priority being obviously on COVID-nineteen patients.
So we have a fair amount of our medical vertical that to reiterate that the negative side of, for example, people not being able to keep their normal doctor's appointments, to take a look at the numbers that we have in
the past. You know, diagnoses
being delayed, treatments being delayed. And so, when we do when the pandemic subsides and people to be able to go back to their normally scheduled doctor visits and they are diagnosed. We have we expect those product areas to to pick back up. And so, I'd just ask you to keep that in mind as you're thinking about, doing the math and seeing what the COVID-nineteen to take a look at the impact was to us in our medical vertical. I would say, Hendi, though, that we as we said in the to take a look at the increases, the COVID-nineteen related increases we were asked to produce, we completed those to take a look at the numbers and those are reflected in the prior quarters.
What we don't know is when the rest of our book of business would get to sort of a pre COVID
Got it. And then Don, in Public Safety, how do you characterize the current business? Has the space out reached its bottom? And when can you start seeing design wins in new products materializing in self turnaround.
Yes. We know we're kind of at the end of a run out with one of our larger public safety to take a look at the numbers that happens in our business from time to time with us and not very often and I'm grateful for that. But we need to have a customer, a long time customer that to be phasing out and so it's kind of offsetting some of the green shoots, if you will, that we have in the public safety vertical. To take a look at the next question. We have some very interesting applications that we're developing there, Hindi.
It's going to be a smaller market for us to take a
look at the numbers in
terms of size, but it's one that's interesting to us and we've got some really big names in there that we're really excited about. I can't really add any more detail than that, but the applications around security for the delivery of packages, for example, to turn the call over to the operator. Thank you. Security of facilities and perimeters of facilities are continuing to be applications to take a look at the equipment for first responders. So all of those are applications that are in production and are developing.
And to We like the vertical. It's going to be smaller than our big three, but it's significant, and We expect to grow there again once we work out the end of this legacy program.
Don and Mike, are we at a point where you can share more about your current capacity expansion in Thailand? In the last earnings call, you mentioned that it may require about like $10,000,000 of CapEx to expand
to take a look
at the next question. Like 100,000 square feet capacity, can we inquire like more information about What is being planned?
Sure. Absolutely, Andy. You heard today that to Mike talked about approximately $8,000,000 of CapEx and we've officially kicked it off and it take about 12 months For us to gain occupancy of the expanded portion of the plant, yes, ask any questions you'd like.
So the 8 months is just like, is like 100% for the new capacity expansion in Thailand?
$8,000,000 is the CapEx number, Hendi, and the time to complete the project to take occupancy of the plant is about 12 months.
Okay. And then Can you share which segments the capacity expansion will be geared more toward to?
To Largely management
Is it also in that?
Largely management. Skyland has a mix of our verticals to take a look at the expansion drivers for approving the project to expand in Thailand were primarily to be driven by new business that we expect from the medical vertical.
And then And back to the gross margin discussions. So I think the way I see it is that your utilization is running high now, to including your faculty in Romania. And then therefore, like let's say that in terms of Having the realistic expectation on your gross margin expansion, should we expect to take more in terms of sustaining gross margin at the current level instead of like boosting gross margin further, Don?
To Yes, I would say that would be the right approach, Hendi, especially given the footprint expansion that we're talking about to take a question and answer session and the favorable tailwind that we talked about. I would just keep asking you to think about the 4.5% long time stated goal around operating to take your questions. And we're reiterating that. I realize that's lower than the last two quarters we've reported, But we know the last two quarters, we benefited from those tailwinds I spoke about earlier. And to We do expect that we'll continue our efforts around margin expansion, to take a look at our target and wonder to take a look at the outlook for the Q1.
We're not there yet. We have more work to do to to improve ourselves. We can set that kind of a target, but that's certainly within our own expectations as management that we would get there, in the not too distant future.
Got it. Thank you, Don. Thank you, Mike. And then by the way, it is great to see Kimball Electronics being named to turn the call back to the operator for the Q and A. J.
Rice:] Well, thank you. Thank you, Hendi. We were glad to see that as well. Thank you. You have a good rest of the day, Hendi.
Thank you. All the best.
All the best.
To thank you. We do have a follow-up question from the line of Anna Soderstrom with Sidoti. Your line is open. Please go ahead.
Yes, hi. Thank you. Just a quick follow-up on the CapEx, the $8,000,000 that's related just to the Thailand facility, right? You have other CapEx on top of that?
To Yes, that's correct.
Okay.
Yes, just that's just the CapEx that would be tied to the footprint expansion to take a look at
our square footage expansion in Thailand.
Okay. Thank you. That was all from you.
Okay, Anya. Thank you.
Thank you. And I'm showing no further questions at this time, and I would like to turn the conference back over to Don Charron for any further remarks.
To turn the call over
to the operator. Thank you, Michelle. Thank you, everyone. That brings us to the end of today's call. We appreciate your interest and look forward to speaking with you on our next call.
To Thank you and have a great day.
At this time, listeners may simply hang up to disconnect from the call. Thank you and have a nice day.