Good morning, everyone. Welcome to the second session here at the Stifel Cross Sector Insight Conference. I'm Matt Sheerin, a senior analyst, and with us this morning is Kimball Electronics, a major electronic manufacturing services company. Representing the company is Jana Croom, a CFO, and Ric Phillips, CEO. Welcome, everyone.
Thank you. Thank you.
Ric is gonna walk, and Jana is gonna walk through slides, and then hopefully we'll have some time for Q&A afterwards. Ric?
Okay. Great. We'll try to move through these fairly quickly to allow for Q&A, as you said. You know, as you mentioned, just a quick overview, publicly traded company, EMS-focused. We really play in three primary industry verticals: automotive, medical, and industrial. We're very selective about where we play. We're kind of at a size that allows for that. As you had mentioned, Matt, you know, it's challenging, short-term choppiness in the EMS industry. We're coming out of a fiscal year 2023, where we grew 35%. And, you know, this year we've seen demand softening, as have all the players in our space. Long-term, really positive track record of growth and profitability, and we really pride ourselves on strong customer relationships. So there's a couple things that we track really closely.
One is, a simple metric that we call win rate, which is, as I said, we're selective about where we play. When we decide we want to go after a program, we win about 75% of the time, you know, playing against some pretty formidable competitors. So, so really happy about, where we're at and where we're positioned for the long term, in the industry verticals that we're playing in, and the strength of those customer relationships, and the really positive growth funnel, that we feel like we have, again, in long term. We play end-to-end, everything from design and development, through the entire manufacturing process. The feedback, you know, I've now just been with the company a little over a year. I've now met with most of our largest customers.
The feedback that we consistently get is that we are very flexible, and partner-oriented in terms of how we interact with customers. So, we do what's necessary for them to be successful and for us to be successful, and as you can see, that runs the spectrum from end- to- end. This is a little bit of our history. I won't take you all the way through it, but you can see in where we entered into some of the vertical markets that we have played in. I think the medical change for us was a big one, and a really positive trajectory that we feel like we have in that space.
You can see we've just almost 10 years as a public company at this point, and have had a really significant shift, I would say, over the last couple of years in terms of how we try to interact with investors, analysts, the coverage that we now have, and how we're integrating as a company into that space, and really feel like we have a really positive trajectory. Very global company. You can see, I won't talk you through our locations, but we're very active across North America, Europe, and Asia. All of our regions actually serve all three of our verticals, medical, industrial, auto, and so we've got a lot of capability and flexibility across that footprint.
We work very closely with our customers in terms of where they want their programs based, and we feel like we've got a good, flexible, footprint and meaningful capacity in order to support that. One important note, in our last fiscal year, we did three major expansions, across the world that increased our total capacity by about 35%, in one 12-month period of time. So, so we're eager to invest. We look to invest, and, and we grow with our customers. Jana, you wanna talk us through this one?
Sure. So, five-year CAGR of 11% growth over time. As Ric indicated, our growth can be a little lumpy at times, in that we have, you know, some significant expansion that happened in FY 2023, three facilities over an 18-month period. Revenues for fiscal 2023, 35% up, adjusted OI, an increase of 110 basis points. As we continue to scale over time, you see improvement in all metrics across the board, including return on invested capital. One thing I will note, for the MMI Top 50 rankings, we ranked number 20th. But if you look at the individual verticals that we participate in, we are, you know, pretty much top 10 or better in all the verticals that we serve. Oh, there. There they are. Oh, industrial is a little off right now. It's 19th.
Still better than 20.
Yeah, we're working on that. So those are the MMI rankings for calendar 2022. We'll be releasing 2023 information here shortly. As you can see, about 45%, automotive vertical, that's primarily steering and braking. The medical vertical has much greater diversity in it, just because of the breadth and depth of that space, followed on by the industrial vertical.
So I will just touch briefly on each of those. As Jana said, within automotive, very focused on steering and braking. We're, again, very selective across each of our verticals about where we play. And so, the more commoditized elements of automotive, window lifts, infotainment, is not where we're gonna play. We're gonna look at those things that are complex, that require very high levels of quality, and that's where we invest our time. And so automotive is really positive for us, our largest vertical today. And these programs tend to be 8-10 years in length. So when we win a new program, it's hard to change it, once you've made that commitment.
It's typically very heavy investment by the customer in equipment, in training, in certification. And so we like where we play in automotive. As Jana said, medical, much more diverse. We play in a number of areas, as you can see. Drug delivery is something that is differentiated for us, so we're able to, so to speak, make the whole box of the equipment and drug. And that really, again, makes us different with a lot of the customers that we work with. And this has been an area. These programs are smaller, typically on average, than automotive. They don't last quite as long, but it's much more diverse in terms of where we can play. We've talked publicly about a few significant wins in medical.
This is the area that we focus most of our business development, new business resources, and we're seeing a lot of success in medical. And then finally, industrial. Again, selective where we play. We often call this vertical for us, Green and Clean. A lot of energy efficiency that we invest in here, as well as factory automation. Really, again, positive area for us, and one that tends to, it evolves more quickly than some of the others, and so we're constantly evaluating where we play. But we like those, the energy efficiency element of what we do here. One of the things, again, I've just been with the company a little over a year, that really attracted me to the business, is the culture.
You know, you can probably not go to a meeting at Kimball Electronics and not hear somebody talk about our guiding principles. Every company has them on the wall somewhere. I can honestly tell you that Kimball lives them. So we do every year, we do a survey very specifically on, are we living these, and where do we need to get better? And we score at the absolute top of the industry in terms of how we do embody those principles day to day. And it's not the first time I've said it, as you can tell. We really do feel like this is a differentiator, and we get that feedback from customers.
As I, you know, travel around, as I said, with most of our largest customers, at some point during the day, when we have a meeting together, the lead from the customer will pull me aside and say, "Hey, we gotta... I know we're negotiating, we got hard stuff to work on, you know, there's always challenges. Kimball's our best supplier, and you guys should know that, that you live what you say you are, and that's why we're with you." I think we touched on these. You know, the expertise, particularly given where we focus on complexity, harsh environments, where quality requirements are really high. Talked about the culture and long-term customer relationships. We really take a lot of pride in that.
As evidenced by a lot of the awards that we're fortunate enough to win each year, we come across these. Last year, our China facility won three Supplier of the Year awards, just in one facility. So, again, this is something that is, it's not just by accident. This is something that we really invest in and take a lot of pride in.
If, if I could chime in for just a moment about, the customer relationships. 77% over 10 years, somebody said, "Well, you're just not adding new customers." That is actually not true. Kimball adds, new customers every year, but the reality of the matter is, the way our business model works, if you aren't growing with us as a certain percentage of sales, we are really good at pruning. So you come in, we'll take on a $10 million contract with a program. If in the next 2 or 3 years, you're not in every facility in the world, and we don't have multiple contracts with you, at the end of that program life, we shake hands, and we part ways as friends. We don't have the resource to continue partnering with somebody who's not going to be, a global customer of size.
And so it's not that we don't bring on new customers, it's that our portfolio pruning is really part of the secret sauce of Kimball, because it's resource, right? And it's return on that resource, and so that's something the company is very, very disciplined about. We run on a single instance of SAP, so we can tell you where your inventory is in every facility that we have all over the world, which I think is also a unique differentiator for Kimball versus some other companies. And part of that is just the organic growth versus, you know, trying to cobble together disparate systems. But if you want to be a customer of Kimball, you've got to grow with us.
Also really proud of what we do from an ESG perspective, and we've made great strides here over time. We are ranked in the top ten in the industry for ESG, and it is something that it really is just has always been and really is part of the fabric of the culture of the organization.
So capital allocation, you know, here are our priorities. It's pretty simple: organic growth first and foremost, followed by return of value to shareholders, typically we do that through share repurchases, and then M&A activity. And it's not that we aren't interested in M&A activity. What I will tell you is we are a very disciplined, strategic acquirer of assets. And so, you know, when you're competing against the PE firms and bottomless pockets of dollars and very high multiples, we're disciplined, and we're only gonna buy something that we think we can run and run well. And so, as we noted, our organic opportunity for growth has been so strong over the past five years, that that's been the key area of focus, returning value to our shareholders over time.
Last quarter, I announced in our earnings call some areas of focus moving forward. We had made a decision to divest an Automation Test and Measurement business called GES due to the fact that we think our opportunities in our core EMS business are bigger and a better fit for us long term. And so we're increasing the focus there. We made a move in our medical vertical, as I mentioned earlier, to bring together some of that drug delivery capability to go after some really big opportunities with major multi-business unit customers. And we're also really focused on controlling what we control in this environment. It is a challenging EMS environment.
You can see it looking at any of our competitors, as well as what we've seen in terms of excess inventory across the supply chain and demand softening from an end consumer standpoint. We're navigating that. We're adjusting our labor force, as needed. We've made very significant reductions in inventory, over $90 million less in the last two quarters, than we had before, and so we're really controlling what we can control, as I said, as we move forward. Talked about the, you know, the challenging EMS environment that, that all of us in the industry are, are enduring, at this moment. It's choppy. We expect the headwinds that we have seen to persist in fiscal 2025. For us, that July first is our fiscal beginning, to 2025.
And as I mentioned, we are proactively aligning our cost structure, working to protect and stabilize margins, and continuing to drive inventory and working capital overall improvements while we continue to invest. We see a very bright future. We see a very strong customer funnel. The lead time on when we win a new program, it's typically 18 months before you'll see the first dollar of revenue associated with that, so we have a good line of sight to the future. And we're working hard to get there. But in the near term, we're gonna deal with the market choppiness, as all of the competitors in our space are needing to do, knowing that we've got a continued really bright future out of us.
Guidance for fiscal 2024. We're reiterating our guidance for the OI income range for 2%-4.6% in net sales. We updated our guidance at our last call with expected declines in the 4%-6% range versus fiscal 2023. Again, it's a hard comp because when you grow 35% and you've got a supply chain environment with inventory, sometimes the market just takes a breather. Updated guidance for CapEx, we brought it in a little bit, not that we necessarily reduced CapEx in total. We just put some efficiency around timing of spend related to new program introductions. That's just good hygiene in this economic environment, and we expect to continue to streamline the company.
A lot of that is related to the disposition of the GES business that Ric talked about earlier, the need to rightsize SG&A going forward for the size of the company we will be without that subsidiary. We'll continue to do that over the course of the year.
Okay. Okay, great. We do have time for questions, so I'll start, and if anybody else has questions, please raise your hand. We'll start with Ric, the automotive business, which I think is down year-over-year. Could you talk about the customer concentration by geography, EV versus ICE? I think I read in your last transcript that it doesn't really matter what the engine is, but could you talk about that exposure?
Yes. So, you made a good point. So our the programs and the capabilities that we have in automotive are independent of whether it's internal combustion, hybrid, or EV. That being said, we have won some programs that are specific to EV, and while over time, because we can apply those across the different engine types, that we can serve those very well. In the short term, when EV penetration is significantly less than what we anticipated, particularly in North America, we've certainly seen an impact from that. And so, that has affected the business.
We have a number of large customers in automotive, and so we like those partnerships, we like those relationships. All of the big relationships that we have in automotive have been 10 years or more. And we really focus on that next generation technology. So we feel good about our positioning. We feel really good about those relationships. As I said earlier, these programs tend to run 8-10 years in length, and so, you know, we're well-positioned for the next one. And that's where we really put our energy and effort.
Yeah, just, just on that, could you tell us, though, like, the geographic, like, is it mostly U.S. customers? Or, or, 'cause or are you also selling into, like, China EV, and what, which, what's the breakdown?
Very global, very global. So one thing I'll say, in general about China is, we're China for China. So, what we manufacture in China stays there, almost completely. And we're very active in that, China EV market. We're also very active in Europe and North America. Most of our automotive production in North America comes out of Mexico, but it is spread across locations in North America as well. So it's very much a global business, and all of those large customers, we're serving in all three of those global regions.
I know you said it doesn't really matter, i.e., ICE versus EV, but it sounds like you've got a lot of contracts within EV. Do you know the percentage or breakdown of your products that go into EV versus hybrid, etc. ?
We don't disclose it, but we do. I would say, you know, the advantage of being engine-agnostic is that you can serve whatever market comes. EVs is a bigger piece of the pie in China, which you would expect, just given, you know, BYD, Chery, Tesla, just the advent of that market there. There are some advantages of a dictatorship, right? Tell everybody, "Buy EVs," and guess what they do? Versus North America, what we're finding is that if you live in the Midwest, your truck has to provide utility. Surprise, surprise, right? If an EV pickup truck can't tow your boat, nobody in the Midwest wants it. And so what we look forward to is the additional work and that's gonna go into making the battery stronger, making that vehicle last longer. That's particularly why braking is so exciting to us, right? And so we're storing that inertia back into the battery, giving it longer life.
Is there a content difference, where you have higher content in EV, with the braking and steering, or no?
No.
Same thing. Okay. Any questions? Yeah, Brad?
Yeah. I wanted to ask about the... You've added capacity while the market slowed down, you know, bad luck story. Where are you—like, how underutilized are you? Kind of, what's the headwind? How much of that headwind can you get back from just the cost and the right sizing? Basically, what's the inflection when this comes back? I assume that's a pretty high margin.
Yeah, I'll repeat the question for the webcast. So the question was: You've added capacity, what's your capacity utilization now? And as you see a recovery, you know, what kind of leverage should you see there?
Yeah, so we added 38% capacity with our most recent expansions. And so we can do well over $2 billion in revenue with our existing footprint. And so you can sort of do the math around, you know, where you think we're gonna end 2024, to see that we have a fair amount of capacity. It's interesting, though, bad timing, yes and no, because your customers wanna see white space, right? So what they don't want is to walk into your facility and it's full, and they're thinking: "Where are you gonna grow with us?" And so one of the things that Kimball does well is acquiring land and green space ahead of time.
We will continue to do that, because that's the death knell of you as a supplier, if your customers walk in and don't feel like they have anywhere to grow. We feel confident that the growth will come. What it does is, you know, it drags your ROIC for a little while, 'cause you've deployed this capital to put up this, this space that you eventually have to fill. In terms of the cost right-sizing, two things, right? One, you can't burden the business every time you, you know, dispose of a city or an asset. That's not fair to the business, that's not fair to the shareholders. You've gotta get the SG&A, the shared services cost right. Further, you know, it's, you're watching revenue fluctuate within your business, you've also gotta protect your gross margin.
It's really going through and saying: "All right, for the programs that we've got, for our obligation to serve, what is the right sizing of our workforce?" We do a lot of automation, which is something that your customers just expect, right? You're investing in technology, factory of the future, automated optical inspection. One of the things that we pride ourselves on is the five nines, right? So 99.999% accuracy, very small scrap rates, very small waste rates, and high, high quality. You've got to be very, very thoughtful about the opportunities for right-sizing of the business in this economic environment. Because what'll happen is, the growth will come back, and you can't be caught flat-footed on that.
So it really is the fine line between being responsible leaders to your customers and your share owners, and also both ways, right? For the current environment, but also poised for the future growth that you know is coming. And that's the work that we've been doing, certainly over the last 6-9 months, and will continue to do as we work through the near-term challenge. But you know, if you let a ton of people go, and then you've got to hire them back and retrain them, and you can actually put yourself upside down on your cost structure when it might have been better. And it depends on the region. In Mexico, when you let people go, the unemployment requirements are such that you're going to have to pay them, you know, 90% of salary for six... It's really the calculus around.
When do we think it's going to turn? What do we need to do? What's the right sizing going to be? And so I know everybody, it, it's more complicated than you would think, and that it is, a bit of calculus and formulas, but that's the work that we've been doing. Somebody said: "Why aren't you done already?" And I said: "Well, if my crystal ball was perfect, you know, we would be," but we're not.
Yeah, you got a question?
Segmented markets, EVs, and ICE, and now GM is announcing hybrid. Represent an opportunity, you know, GM's going back into hybrids in 2027. Does that represent an opportunity for you guys or not?
We serve the hybrid market, too. I apologize. Yeah, so, we sort of say ICE or EV. If it's a hybrid vehicle, it goes in the EV section because it has a component of it that is battery- operated. But for us, agnostic, it doesn't matter which-- doesn't matter what powers the car going forward, we can provide.
You do want a hybrid. Do you have package for EV side of it, and you have the ICE side of it? That is within our-
Well, because we're so 70% of our business is steering. It doesn't matter. It truly is engine agnostic.
Just to double check, my question is, does that present any platforms to go with as it shifts to now we're going to do hybrids, but again, I'm not sure what the platform was? Just kind of how does that then happen? Yeah, if there is a shift, like you said, back to hybrid.
So the way it works, I'm going to try and explain. The end market consumer is only going to buy so many cars, right? And so you're either going to be buying a combustion engine, a hybrid, or an EV. The opportunity for Kimball is not so much in the number of cars produced or market, it's in the change in the content of the market. So, for example, your steering column, you used to just turn the wheel, and that's it. Now, you've got automatic lane departure features, self-parking, autonomous driving. The growth is really in the electronification of the capability of the car. You basically drive KITT from Knight Rider right now, right? It, the future is now. For braking, it's, you used to have braking on axles, now you'll have braking on wheels, right?
And so the efficiency, in terms of the braking in order to store power back to the battery and the electronification and capabilities that you need there. And so those are exciting. And then ADAS, right? So, the way that the car assists the driver under the hood and doing all of the things that make the driving experience safer, more efficient, and more enjoyable, those are the areas that we're playing in. And again, those are agnostic in terms of what vehicle type. We go to our customers, and we pitch all programs for all vehicle types for those things, but those are primarily the areas where we play and where our growth will be derived from. Did I answer your question?
A little bit. I was just saying, I think the thrust of the question was: they were going EV, and now they're saying-
They're going hybrid, right?
So does that create platforms such that you're winning here, now it's open to something new in the world, too? I'm just kind of curious, does that-
We'll win hybrid there. So if you, if you think of it, whatever was going to go EV is going hybrid. We've got that contract, too.
That's what I'm saying.
Yep, it just, it will just roll over. Yes.
Yeah, I would say whenever we really try to be on the forefront of next-gen programs. And so regardless of technology, when there's a next-gen program, that's good for us. And typically, we have those existing relationships and capability, so there's another chance for an 8-10-year program.
Okay, well, it looks like we're out of time, but thank you very much, Ric and Jana. Thank you.
Thank you.