Good morning, ladies and gentlemen. My name is Geronimo, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimball Electronics Fourth Quarter Fiscal 2017 Financial Results Conference Call. All lines have been placed on listen-only mode to prevent any background noise. After the Kimball speakers’ opening remarks, there will be a question-and-answer period, where Kimball will respond to questions from analysts. [Operator Instructions] Today’s call, August 3, 2017, will be recorded and may contain forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Risk factors that may influence the outcome of forward-looking statements can be seen in Kimball’s Annual Report on Form 10-K for the year-ended June 30, 2016, and in today’s release. The panel for today’s call is Don Charron, Chairman of the Board and Chief Executive Officer; and Mike Sergesketter, Vice President and Chief Financial Officer of Kimball Electronics. I would now like to turn today’s call over to Don Charron. Mr. Charron, you may begin.

Thank you, Geronimo, and welcome, everyone, to our fourth quarter conference call. Our earnings release was issued yesterday afternoon on results of our fourth quarter ended June 30, 2017. We have posted a financial summary presentation to accompany this conference call. The presentation can be found on our Investor Relations website within the Events & Presentations tab, or if you are listening via the webcast, you can find it in the Downloads tab on the webcast portal. I will begin by making a few remarks on the overall quarter, and then I’ll turn it over to Mike for the financial overview. After that, we will answer any questions that you may have. Our sales in the fourth quarter of fiscal year 2017 were up 4% from the previous quarter and up 9% when compared to the fourth quarter of fiscal year 2016. Year-over-year growth in all four of our end-market verticals, including double-digit growth in two of our end-market verticals helped us set a new quarterly sales record for the sixth consecutive quarter and provided a strong finish to a record-setting fiscal year 2017. New program launch and ramp-up activity combining with the successful integration of our recent acquisitions has created significant momentum and positioned us well to achieve our goal of $1 billion in annual sales in fiscal year 2018. We continue to face margin pressure as we absorb the costs associated with our next phase of the ramp-up in our new Romania operation and another large wave of new program launches. In the just completed fourth quarter, we also experienced higher than expected healthcare costs in the U.S., which negatively impacted our margins. However, our bottom line was assisted during the quarter by favorable foreign exchange tailwinds. While we made good progress in fiscal year 2017, we still…

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 & Presentations tab, or if you are listening via the webcast, you can find it in the Downloads tab on the webcast portal. As shown on Slide 3, our fourth quarter net sales were $241.3 million, which was a 9% increase compared to net sales of $220.4 million in the prior year fourth quarter. Incremental net sales related to acquisitions within the previous 12 months did not materially contribute to our consolidated net sales in the fourth quarter of fiscal year 2017. Slide 4 represents our net sales mix by vertical. Comparing our net sales by vertical to the same quarter a year ago, our automotive vertical was up by double digits, driven by steady demand in North America and Europe and new program introductions, including the ramp-up of programs in our new Romania facility, all of which more than offset declining demand in China. Our medical vertical was up in the mid single-digit range compared to Q4 last year, as a new program introduction and contributions from our acquisitions within 12 months more than offset a reduction in demand from several of our largest medical customers. Sequentially, compared to the third quarter, our medical vertical sales were up by double digits, primarily as a result of the new program introduction. Our industrial vertical was up as a result of new product launches and increased demand for climate control products, which more than offset a decline in demand for components for industrial pumps. And our public safety vertical was up almost 40% from the prior year quarter, largely from the ramp-up of a couple of new programs. Our gross margin in the fourth quarter…

[Operator Instructions] The first question comes from Hendi Susanto of Gabelli & Company. Your line is open.

So looking back into the last four quarters, can you share some insight on the ups and downs of your four major markets’ sales growth? When I look into it like medical for the year grew 3%, public safety had strong second-half, auto sales were strong throughout the year and industrial grew 10% in fiscal year 2017. So I’m wondering whether you can share your perspective looking back into fiscal year 2017 and what we should expect for fiscal year 2018.

Yes, Hendi, that’s – it’s a good topic to start the questions with today. Our overall demand and our growth for the year when it’s all put together at a double-digit growth rate is something we are pretty pleased with. I think, when you look at our diversification strategy to diversify across these four end-market verticals, it’s working. I mean, from our point of view, it’s working. And we’ve seen this over the last few years actually, where maybe when we see some sluggishness in one end-market vertical, we see some pickup in others. And so when you look at the full-year, fiscal year 2017, obviously automotive remained very strong for us. And actually, we have arguably the most visibility when it comes to automotive, because the programs are typically awarded a couple of years in advance of the start of production. And so, the biggest variable there really ends up being not so much the start of production, but what will the actual volume be on the new programs we launch. So we have more visibility there. And, as we’ve said in the past calls, we feel like our automotive vertical will remain strong based on the business we have and the business we’ve been awarded and the business that’s left to be launched. When you look at the other verticals, we don’t have as much visibility. We know the business that we have and the ups and downs are really more related to the actual end demand and market demand. And obviously, starting with public safety being our smallest vertical of the remaining three, that’s probably our lumpiest. I don’t know if you could look at four quarters and make any sort of determination of what’s really happening there, because it’s pretty lumpy in general in terms of…

Okay. And then any insight into your outlook for fiscal year 2018, Don?

Well, we reiterated the fact that we believe we’re positioned to hit our long-stated goal of $1 billion in annual sales in fiscal year 2018. And so, finishing this year at $931 million, that’s obviously a pretty nice step up in growth again, to reach $1 billion in fiscal year 2018. And so, I think we’ve put that goal out there, Hendi, maybe more than two years ago now and we’ve been tracking to it. And yes, we as a management team, feel confident that we’ve got a good – we’re positioned well to achieve that $1 billion goal in 2018.

And then, Mike, can you talk about the Romanian facility, where we are, what we should expect in 2018 with respect to the transition and the impact on the gross margin?

Well, I think, Don commented on it in his part of the discussion. We do expect to achieve operating break-even by the end of the fiscal year. We are expecting to see some significant growth there. In the current quarter, I think quarter-over-quarter, we are seeing kind of similar results to what we’ve seen in the prior quarters. So we’re kind of right on the cusp of where we see, as volumes ramp up, we are going to see some improvement in those results over the next four quarters.

Okay. And then, can you quantify a bit on the gross margin level, how that operating break-even may translate?

That would be a bit of a challenge.

I see.

We do believe by the end of the year, we’ll be at break-even operating income.

Okay. So by exiting the Q4 of fiscal year 2018?

Yes.

Yes, okay.

That’s correct.

Yes. And then, the press release mentioned that there’s some higher healthcare costs in Q4, should we expect that to continue?

Well, we don’t know that we can really answer that question. There’s lots of variables there, Hendi, that makes that unpredictable. I’ll just reiterate the fact that we – it was in the fourth quarter higher than we expected, and we have historical data that we certainly can look at. It’s not necessarily a predictor of the future in terms of our healthcare costs, but we would tell – we’d want to reiterate the fact that the fourth quarter was higher than we expected, and it was pretty significant. It was 50 basis points on our operating income line. So that will just give you an idea of the size of the impact that was beyond what we would have expected. And so, we hope that it would return back to something that’s more normalized, but we really can’t say that.

I see. Okay. Thank you, Don. Thank you, Mike. And all the best reaching the $1 billion goal.

Thank you, Hendi.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Chase Basta of AWH Capital. Your line is now open.

Hi, Don and Mike, thanks for taking my questions.

Hello, Chase.

You talked about margin pressures that you are facing in Romania still being in the ramp-up phase, as well as new program launches, and I think you touched on healthcare. Can you just kind of break-down where those costs are being reflected in terms of being in the COGS or the S&A line?

Well, most of – like the Romania costs are primarily reflected in the COGS line, that’s where we are seeing those. Healthcare costs are same, yes. It’s – we have a large indirect workforce in the U.S., and so most of those costs are related more directly to production. So they’re showing up in COGS as well.

Okay. So it sounds like healthcare was a big contributor to the decline in gross margin during the quarter. You touched on the ramp-ups also being a contributor. But I know this has kind of been the case for the last several quarters. Does this kind of indicate that the level of new business ramping has accelerated during the quarter?

I would say, it remains at a pretty high level. It’s supporting basically a double-digit growth rate, which is pretty significant. We would consider that from a new product introduction standpoint that it would be 1.5 times, maybe as much as 2 times the normal activity for our business when we look back over a several-year period. So as we add those costs to support those launch activities in advance of the revenue, we get a little bit bigger drag that tends to normalize a little bit once we get to a more normalized run rate of new program launch activity. Look, we are really happy with the new program wins, the new business wins. We – it’s exceeded our expectations in terms of the successes we’ve had in winning new business. And so, we feel like we’ve got to continue to get better through the launch cycle, and we are working on those kinds of things and try to improve, if you will, the performance between the receipt of the award and actually getting the product up into production and generating sales and profits. So we’ve got plans to improve that cycle and in terms of its impact on our earnings. But I would want to say, we’re very pleased with the win rate right now, the addition of new business awards. We would consider it to be maybe, as I said, maybe 1.5 times to 2 times like a normalized run rate for us. To just maybe to add a little bit more color on the – I think, in terms of our future performance, we are very focused on Romania in this next phase of the ramp-up in Romania. We’re very pleased with Phase one, getting the customer approval, starting revenue. We are now shipping a measurable amount of revenue out of Romania on a quarterly basis. And as I mentioned, we expect that rate that we finished in fiscal year 2017 fourth quarter to double throughout the fiscal year 2018. And so we’ve got to make that happen. And as we make that happen and approach our break-even point for Romania, that’s going to have a significant impact on our earnings results.

Okay. And then, did you guys say what the profitability drag was this quarter out of Romania?

It’s – we didn’t say this quarter, I think, if you go back to last quarter, it’s very similar to the Q3 report that we gave you somewhere around $1 million on the operating line. But if you go back to our last quarterly report, it – the Q4 drag was pretty similar to the Q3 drag we reported in Q3.

Okay, great. Thanks, guys.

Thanks, Chase.

Thank you.

Thank you. [Operator Instructions] And we have a follow-up question from the line of Hendi Susanto.

Hi, Don. Looking into fiscal year 2018, is there any plan to enter new markets?

Well, we are in the process, Hendi, of updating our strategic plan, as we do each and every year. And there’s, obviously, those types of considerations that are on the table at that point in time. Certainly, we don’t have anything we are ready to announce at this point in time. I think the good news is, we see continued growth in the four end-market verticals that we’re focused on. And so I would tell you that, we’re not going to get too far off of that path, not going to distract ourselves too much from those four verticals while we’re seeing pretty good growth opportunities there. But as we look further out and we start to set new growth goals beyond $1 billion, that certainly will come into the realm of a possibility.

Got it, yes. And then, Mike, how should we think about capital allocation and share repurchase for fiscal year 2018?

We’ve been running and we’ve talked about this in several of our past calls, we’ve been running at a rate that’s higher than what we would normally target. And we are looking for an opportunity to sort of normalize our CapEx – and somewhere around the annualized depreciation is really what we are targeting.

As far as the share repurchase program, Hendi, we are, as reported, we are $15 million into the second $20 million, if you will, or $35 million into the $40 million that our Board has approved. And so we have that on the agenda in the August meeting. We’ll decide for the upcoming year what the final capital allocation will be. But we don’t have any further information to share at this time.

Okay, got it. Thank you.

Thank you. And I’m showing no further questions at this time. Mr. Charron, please proceed with any closing remarks.

Thank you. And that brings us to the end of today’s call. We appreciate your interest and look forward to speaking with you in our next call. 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.