All right. Welcome everyone to day two of the sixth annual KeyBanc Healthcare Forum. My name is Brett Fishbein, Senior MedTech Analyst, and I'm pleased to be joined this morning by Kimball Electronics, who's represented today by Jana Croom, the CFO, and Andy Regrut, IR. I'll start us off with some questions. There's a box to submit questions in the audience, if you have some, and if we have time, I can relay them to management. Thanks for joining us this morning. Was hoping to just kick things off, maybe for the investors with a brief overview of Kimball, as a company, for those who might not be fully up to speed on what you guys do, maybe touching on just some of the core markets that you currently serve today.
Yeah. Good morning, Brett. It's a pleasure to be here with you today. I'll give a brief history of Kimball, and Andy, feel free to chime in. Our company has been in existence for over 65 years, and we started off as organ builders. From that rich history of organ building, the company split into a company that manufactured furniture and a company that manufactured electronics. Eleven years ago, Kimball Electronics spun out of Kimball International and became its own publicly traded company. We operate primarily in three verticals, automotive, industrial, and medical. We do the printed circuit board assembly for so many products that you all use every day and just don't know that Kimball services the pieces and parts of those organizations. In automotive, it's primarily steering and braking.
In industrial, which we call our green and clean vertical, it's a lot of climate controls, off-highway equipment, and other things. In our medical vertical, it covers not just electronics, but full and finished assembly of products and also a CMO, which is much more of the plastics molding portion of our business. We actually just opened a state-of-the-art CMO facility in Indianapolis, and that will serve as the flagship for our CMO business.
Brett, we have a global footprint, and we have operations in North America, in Asia, and in Europe. For all intents and purposes, with the exception of the facility that Jana just mentioned in Indianapolis, they look and feel pretty much the same. They are very clean, well-lit, almost labs that produce the printed circuit board assemblies that Jana mentioned. They serve for, in general, all three verticals out of all facilities, but with different concentrations. In China, we do an awful lot of automotive work, and in Thailand, we do an awful lot of medical work. What's special about the footprint and the facility in Indianapolis is a move into more completed medical devices.
We don't produce the electronics, we produce the full surgical instruments, drug delivery systems, and medical devices that you would expect to see in many medical operations.
All right. Great. I think that was a really good overview. You know, I think, you know, this is a healthcare conference. Most of the people listening in are probably skewing towards, you know, healthcare in terms of focus area. Maybe would be really interested, just kind of your philosophy on the portfolio. I know part of the strategy has been shifting more of the focus into healthcare and medical end markets. Maybe just more on, like how you see the business evolving strategically over the next few years and some of the rationale behind, you know, your focus on medical end markets.
Yes. Kimball made the strategic decision two years ago that we were going to intentionally shift our business to the healthcare space. You know, if you think about the breadth and depth of all of the capabilities available in the healthcare space, it was really attractive to us for a few reasons. It gave us an opportunity to marry, in a meaningful way, our electronics capability with our plastics molding, drug delivery capability, et cetera, all things medical to gain stickiness in the supply chain and to improve our positioning for what we were doing with customers. The margin profile of the CMO space is also very attractive to us in terms of what it offers from a CMO/CDMO space. We as a leadership team set about, all right, how do we do this?
It was really organically through investment in state-of-the-art facilities. We've also publicly said that we will have an inorganic or tuck-in strategy to add adjacencies in the space that are attractive to us, in order to round out the portfolio more holistically.
Brett, I'm sorry, Jana. Some of those capabilities in Indianapolis that are unique are things like being able to handle the drug.
Mm-hmm.
We don't manufacture the drug, but we do handle it, and we do include it in the full completion or full manufacture of drug delivery systems. Think of like an auto-injector. That's a perfect example of the type of product that we build and the capabilities we believe are unique in the supply chain to be able to hold and handle that drug in the manufacture.
Well, that's a really-
Cold chain capability.
Oh, sorry, Jana, go ahead. Go ahead.
Oh, I was just gonna say.
Sure
cold chain capability, Class 7 and Class 8 cleanroom capability, along with what Andy described in terms of an ability to handle drug.
Well, I was gonna say that was a really, like, good transition to my next question. I think one of the first, you know, questions folks usually have about manufacturing companies is just understanding the competitive differentiation and areas of strength. You know, drug delivery and auto-injectors being one. Maybe just expand on a couple other, you know, points of strength and where you see differentiation from, like, some of the competitors.
There are a few areas. I'm gonna talk about electronics manufacturing and then also CMO, and one of them is the full and final assembly capability. What we can provide for the medical customer is not just a piece of the supply chain, but really the full and final finished product assembly, box it up, put your label on it, ship it out the door. That's really attractive. What we find is our customers love R&D. They love IP. They love to develop products. They don't necessarily want to make them, right? They're not manufacturers. We are a manufacturer, and so design for manufacturing, DFM, design for production and scale, right, volume, is something that we partner very closely with our customers on. We take their product from a solution to a product, right?
In many cases, you'll have a customer, and they have a solution in the marketplace. We help them make it a product, meaning you can manufacture it for volume that the end user can actually use at a price point that the market finds desirable.
Brett, an example of bringing that to life is an auto-injector that we manufacture in Indianapolis. It has electronics that come from one of our other facilities in the footprint, and the electronics are incorporated into the drug delivery device. When you initiate it, when you use it actually provides audio prompts of how to administer it. It tells you know, once you've started it, push this against your skin, hold it for a period of time. It'll count you down and then tell you to release. If you're in a situation that involves high stress, this provides a solution that we believe is a differentiator, but it's that vertical integration with the electronics and the full manufacturer of the plastic and the device that is a really good example of how we're different in the marketplace.
The other thing that we're seeing is everything is getting smaller. Whereas before you had huge CT scan machines, MRI machines, everything is smaller, portable, more favorable to the patient in terms of usage for diagnostics. We can partner in terms of how you take this design and actually manufacture it for the end user in a meaningful way.
All right, perfect. I'm gonna transition a little bit just to the current year. You guys reported 2Q results for the quarter ended December thirty-first recently. You're in your third quarter of the year. You know, thinking about Q2, the medical business had a really great quarter, you know, 15% growth, but, you know, some declines in the other segments. I was hoping you could, you know, maybe just talk through what's driving the strength in medical, you know, currently, and then just, like, where you're seeing some of the offsets in the other areas of the business right now.
Yeah. I'll start off by just saying that our growth in the medical segment was in all three geographies and was in CMO and EMS space across multiple programs, across multiple customers. It is the result of the strategy that we began in earnest two years ago, really fully coming to fruition and growing the medical segment broadly. We were very pleased. It's not driven by any single customer. It's not driven by any single geography. It really is breadth and depth of growth in the medical space. A solid growth in the CMO, but also solid growth in our electronics capability space. We would expect that growth to continue into the future.
The other two segments, our autos, for example, has been impacted by the loss of a single large program, not due to any fault of Kimball's quality issues, et cetera. It was a commercial agreement between the OEM and the tier one that we were supplying to, and so that program went away. We have anniversaried that loss, and so what we've guided to is for the third quarter, what you're gonna see is a flattening of the automotive vertical and perhaps even a small increase, but not a continued decline because we've made our way through that. Then in the industrial vertical, we've just seen some softening in the climate control space. Again, we're watching that market very carefully, and expect for that to flatten and rebound in the future as well.
Climate control for us would be residential and commercial HVAC system, the electronics associated with those. Those would be very much dependent on what's going on in the housing market or the real estate market. Because we serve all three verticals across the globe, you can have different dynamics going on with each of those verticals. For instance, probably not a surprise, automotive in North America is tough right now. That may be different than automotive in China, it may be different than automotive in Europe. What we tried to do is lay out at the beginning of the fiscal year expectations for what we thought would be the appropriate growth profile in each of those verticals. We're actually on track for that.
We raised our outlook for the full year back in February, so feel good about that. It is very much driven by growth in that medical vertical and some of the drivers that we mentioned a few minutes ago.
Yeah. I wanted to also just ask, you know, based on coming out of the second quarter, you did raise the guidance for revenue, I think by something close to the $25-$30 million at the midpoint, $1.4 billion, you know, below the guidance from $1.35 billion. Then also, you know, your adjusted income margin ticked up by a little bit, you know, to 4.2%-4.5%. Curious kind of like what is going better on the margin that, you know, kind of drove the guidance raise.
It's really the gross margin line that's improved dramatically. What we said. We had a few significant events that happened to come. Well, I talked about the automotive event, and we also had a medical customer that had an FDA recall. As we were pursuing our medical strategy and a return to growth, we've talked a lot about control what you can control. That means rightsizing the business for the environment that you're in, working capital discipline and management, pulling down inventory, and really focusing on debt levels and interest expense reduction. You're seeing that come through in the gross margin line.
It is the result of very intentional work that the leadership team has done to ensure that while we were stabilizing the top line and returning to growth, we were good stewards and gave the most efficient margin utilization to our shareholders that we could while we were all waiting for the top line to resume.
Yeah, some of those actions included a couple of years ago, divesting of a non-core asset in Automation, Test, and Measurement, and also closing one of our facilities in North America, the manufacturing facility in Tampa, and moving that work to other locations in our footprint, some of it in Jasper, Indiana, some of it going overseas. Those steps that Jana alluded to position the company from a cost perspective so that when volumes return, we can very much see that growth in the gross margin profile of the company.
All right, great. I'm gonna shift gears one more time. I wanna dive a little bit deeper into the portfolio and talk about some of the medical end markets especially, and then maybe a little bit more on the other segments and your recent facility build, you know, before we wrap it up today. Just, you know, diving a little bit into medical, you know, in some of your investor presentations, you've kind of called out, you know, five or so key areas within the segment, including sleep and oxygen therapy, surgical systems, AEDs, ambulance and hospital monitoring systems, and then drug delivery, which we've talked about a little bit.
Maybe just take a minute or two to kind of discuss, you know, your positioning within a couple of those key end markets, and maybe like a little bit more background about how you identified or got into those five, if it was more a function of, you know, customer relationships evolving over time, or if it's more a function of, like, finding areas that you think fit Kimball's strengths or maybe a little bit of both. Would definitely be interested in how the strategy's evolved there.
It's definitely a combination of both, right? It's customer relationships. Often customers will come to us, and we're in a single division, and then they will ask us to bid on a body of work, product or program in an adjacency. Certainly we built out the business through that over time. Also, Kimball has a very strong capabilities matrix that we use to judge what areas of all of the verticals we should enter into. It's do we have the engineering capability and know-how, operational efficiency and capability, tooling capability that would lend themselves to specific areas of the medical space. The products and programs that you listed off are a result of years of intentionally working through that strategic profile to add all of those products and programs into the Kimball portfolio that ultimately serves our customers.
When we started off in the medical space, part of the reason why we moved into that adjacency from automotive is if you have facilities that are already ISO certified, overlaying FDA certification is actually a fairly easy thing from a quality and engineering standpoint. From there, we went from building the electronics to more full assemblies to full and finished box assemblies. It really has been a progression over time, a very intentional progression of again, adding stickiness to that supply chain in a meaningful way.
Targeted to the capabilities matrix that we had identified.
The move into medical was right around the turn of the century. I mean, we're talking 25 years ago, we got into the medical electronics business. Then about 10 years ago, we made an acquisition in Indianapolis. Medivative was the company we acquired, and that's what moved us into more of the plastic injection molding and the full medical device assembly. In fact, the campus that we acquired in Indianapolis is still in existence and in operation, and it's. We're moving the production from that existing facility, which is a collection of small buildings, into the new state-of-the-art facility that we just opened up and cut the ribbon on last month in Indy.
All right. Great. Wanted to also follow up on the drug delivery topic. I think it's, you know, a very popular theme in the healthcare space, you know, kind of the rise of auto-injectors and specifically GLP-1s. I wanted to just ask, you know, how that, you know, area has contributed to your performance in recent years and just, like, how you think about that as an opportunity or maybe a risk as, you know, some of the options evolve into, like, oral medications and other, you know, forms of delivery.
We're excited about the auto-injector space not just because of GLP-1s, but because of the proliferation of the opportunity as it relates to a drug delivery device. GLP-1s, you're always gonna have those who wanna utilize it by auto-injection for efficacy purposes, and for lifestyle purposes. What is really exciting about the auto-injector space is all the opportunity that exists for that mode of medical treatment and drug delivery related to tons of other drugs that none of us have ever heard of, right? If you think about the GLP-1 space, and you think about it five years ago, who had really heard of Wegovy and Zepbound and Ozempic and all of these drugs?
For us, the auto-injector space and the excitement around that is for all of the drugs that none of us have broadly heard of yet, and just the proliferation of opportunity in that space related to drug delivery and to be able to play there in a meaningful way. The other thing that we know is, you know, drug adaptation and adoption only works when there is volume. People often ask us, "Well, who are you going to take share from in the auto-injector space?" I can tell you that the space is growing so rapidly and the demand is so strong that it's not about taking market share from any competitor. It's about coming into the fold in the portfolio and saying, "We're here, and we can offer this service as well," because the demand is just so strong.
Yeah, no, make sense. Definitely, ride the wave of market growth in that space. Maybe similarly, just curious, just thinking about your different focus areas, we kind of listed off five of the key ones. If there's any in particular, like one or two, that maybe stand out to you guys as most exciting just from a growth and opportunity standpoint over the medium term.
Drug delivery obviously is a really exciting growth area for us that we're interested in. We're also interested in, you know, microfluidics and the cardio space and some other, you know, surgical instruments is exciting to us. Again, as we watch the market move and instruments get smaller, the electronic components have to be smaller or the way that you configure them and put them together technically in terms of what you're able to produce. Some of the redundancies that are required in the healthcare tooling are also very exciting to us because it's more content in a smaller space that you're seeing, which is exciting. Full and final assembly of product is an exciting space. You can do that across the product line and program cycle for Kimball.
It's just an opportunity for more and more content and a better margin profile for the company.
Can you help us just think, you know, a little bit about customer concentration? I know, like, Philips is a key customer and comes up a lot in conversations. Maybe just contextualize a little bit, you know, how you think about customer concentration, and kind of like where that fits in maybe just, like, how you think about the medical portfolio overall.
Yes. Philips is listed as one of our top three customers and over 10% of our revenue. I like to remind everyone that is comprised of 11 different divisions within Philips. Not a single, you know, program or product, but a portfolio of work that we do for Philips that all adds up to, you know, roughly 10% of the revenue of Kimball Electronics. It is our practice because of our customer relationships that we would look to come in with a single program with a customer, do that really, really well, and then add on more programs and products over time, right? Philips is a great example of that, and they're a wonderful customer and partner.
We started off in a single division of Philips over a decade ago, and we grew that relationship to what it is now. If you look, 70% of our revenue is derived from customers that we've had over 10 years or more. We're very proud of that, the stickiness that we have with our customers. Our goal is to add roughly five new customers a year because you also have to refresh the portfolio, new products, new capabilities, new opportunities to grow. That's how we build. I will tell you, contract manufacturing is about scale, and so you wanna come in with a customer, and you want to earn the right to do multiple programs and multiple products with them because the administrative burden is not insignificant in terms of what it takes to source a customer.
We like sticky relationships, long-lived relationships, and to do a total package, and portfolio offering for the customers that we serve. The fact that we can service them regionally and multiple areas of the world is also what makes Kimball an attractive partner for our customers.
Yeah. One other thing to add to that is we do operate off of a single instance of SAP, so that gives us a competitive strength across the footprint. Indianapolis is the only place right now where it's a little bit different than that single instance. Broadly speaking, we have a single instance across that footprint. To Jana's point, a customer relationship can last for decades. We look to grow that relationship, and we can provide them a full suite of support across the globe with excellent visibility of their products across our footprint.
All right. Then I'm gonna shift gears one more time, back to manufacturing and the new facility. I think, you know, you touched on some of the key geographies that you're currently, you know, embedded in across the portfolio earlier, but maybe just specifically on, you know, the state-of-the-art facility that you opened last month. Would love to just hear a little bit more about, like, the intention of, like, what you wanted to build with that facility, relative to what you had before, and then maybe just how you think about, you know, the new facility and how that can support long-term growth and absorb, like, more capacity into the future?
It is a 300,000 sq ft facility with an option to exercise another 200,000 sq ft. It has cold chain capabilities, Class 7 and Class 8 clean room capabilities. It has a design lab. I mean, it truly is a state-of-the-art facility. When you're talking to, you know, big pharma, big med tech, they need to see it, the capability to grow into your space, and so the need to demonstrate white space and growth and capabilities. We actually had a customer come into the building. It's three hundred thousand square feet, and they said, "How big is your option for additional square footage?" Right? Because they're thinking, you know, huge manufacturing and scale is important.
For us to play in some of the spaces that we want to play in strategically, building this facility was an absolute game changer for us in terms of, you know, demonstrating skin in the game, demonstrating our commitment to growth, demonstrating our commitment to scale, that our customers could truly come in and actually visually see, taste, touch, smell, in order to win future business with them.
Yeah. It is huge. 300,000 sq ft under roof is tremendously large. It'll either double or triple our cleanroom manufacturing space, our controlled manufacturing space, which isn't cleanroom seven or eight, but could be, and the number of plastic injection molding presses that we can operate. It is a tremendous area with, as Jana mentioned, room to grow as we fill it.
I wanna also ask about M&A. I think that's part of, you know, the strategy, and I know I've heard you speak before about some of, you know, your key, call it criteria, and that's about adding geographies and expanding, you know, your existing end markets and broadening vertical integration within those markets. Yeah, all those make sense, but maybe just, like, a little bit more about, like, what are, like, kinda the must-haves when you look at acquisitions or, like, the top one or two things that you guys really wanna see? Then any other just, you know, more broad comments on the overall acquisition strategy and how that fits in, like, alongside the organic strategy.
Yeah. One of Andy's additional jobs in addition to being our IRO, he also leads our corporate development practice, and serves as our treasurer. The reason that that's intentionally together is as we think about strategy and development and space, we are constantly partnering together to think about, all right, strategically, what makes sense for advancing this strategy in a more meaningful way? It really is about geographies, adjacencies. What does Kimball do well right now, and what would round out the portfolio in terms of offering for our customers in a meaningful way that would fit together with the current portfolio that we already have? Our CMO space primarily is North America based right now. How might we expand that geographically?
Might this inorganic opportunity have customers that would be desirable for Kimball to have in the portfolio where we could grow relationships with them over time?
Yeah, to size up opportunities, we went through a fairly extensive list of manufacturing capabilities that we would like to add. An example would be micro molding. We do quite a bit of plastic injection molding, but micro molding would be a much smaller component that is pressed out of resin. That's an example of the capability we wanted to add. To size up the adjacencies, we looked at different end markets, and we looked at the components and growth profiles within those end markets, and then overlaid them with the manufacturing capabilities. Now we have a really good idea of what we wanna add in terms of our manufacturing capability and what end markets or adjacencies it would serve, and then that leads to the customers.
What customers would be new, and we could add new relationships to the entire Kimball footprint? What would be existing customer relationships that we could expand? It's a combination of all three of those, along with the geography. Oh, you're on mute there, Brett.
Thank you so much. I'm gonna sneak in one more question here in our final minute, and also it'd give you a chance to leave the room with any final thoughts. Yeah, I'll try and do this one quickly. I think part of the medical strategy is also just improving the margin profile of the company. What do you think, like, long-term margins could look like if that strategy continues, you know, to shift and proceed as expected? Just wanted to thank you guys so much for joining us today in the conference, and thank you to everyone in the audience for listening.
Well, it's a pleasure to be here, so thank you for inviting us. I wanna say that first and foremost. In terms of the margin profile capability, we will still be a CMO, so contract manufacturer. Being able to move up beyond our goal of 5% adjusted operating income into maybe the 6% or 7% operating income margin is exciting for us.
Yeah.
I do try and temper people just a little bit because it's not gonna be, you know, 10, 11, 12% off the bat. It's going to take us a while to grow into the space and to develop that margin profile, growth over time. Even moving from where we're at right now at 4%-4.5% adjusted operating income, you know, into the 6.5% would represent nearly a 50% increase in operating income margin, and that's really, really exciting for us in terms of opportunity. That with some top line growth, and boy, you really, really get a multiplied expansion of value for the shareholder, and that's really what we're after.
I think that's a great note to leave it off on. Thank you again so much for joining today, and have a great rest of the conference.
Thank you so much for your time.