Good morning, ladies and gentlemen. Welcome to Kimball Electronics’ First Quarter Fiscal 2025 Earnings Conference Call. My name is Maria, and I will be the facilitator for today's call. All lines have been placed in a listen-only mode to prevent any background noise. After the completion of the prepared remarks from Kimball Electronics leadership team, there will be a question-and-answer period. [Operator Instructions] Today's call, November 5, 2024 is being recorded. A replay of the call will be available on the Investor Relations page of the Kimball Electronics website. At this time, I would like to turn the call over to Andy Regrut, Treasurer and Investor Relations Officer. Mr. Regrut, you may begin.

Thank you, and good morning, everyone. Welcome to our first quarter conference call. With me here today is Ric Phillips, our Chief Executive Officer; and Jana Croom, Chief Financial Officer. We issued a press release yesterday afternoon with our results for the first quarter of fiscal 2025 ended September 30, 2024. To accompany today's call, presentation has been posted to the Investor Relations page on our company website. Before we get started, I'd like to remind you that we will be making forward-looking statements that involve risk and uncertainty and are subject to our safe harbor provisions as stated in our press release and SEC filings and that actual results can differ materially from the forward-looking statements. Our commentary today will be focused on adjusted non-GAAP results. Reconciliations of GAAP to non-GAAP amounts are available in our press release. This morning, Rick will start the call with a few opening comments. Jane will review the financial results for the quarter and guidance for fiscal 2025, and Rick will complete our prepared remarks before taking your questions. I'll now turn the call over to Rick.

Thanks, Andy, and good morning, everyone. Before we get into the quarterly results and our continued theme to control what we can control, I'd like to take a moment to highlight the progress we have made thus far to strategically position the business for the future. First, we restructured the company by divesting the noncore AT&M business and we folded the medical CMO business into our core EMS portfolio, allowing us greater focus on key and growing areas of the medical vertical. We are seeing the differentiation and potential new customer opportunities from this shift. Next, and consistent with this move, we have sharpened our strategic focus in all three of our vertical markets to target attractive current and new market spaces that fit our capabilities. Some examples of these spaces include domain controllers in automotive, off-highway equipment and energy storage solutions in industrial and high-level assemblies and drug device combinations in medical. Another set of actions to position our business for the future has been on the cost side, where we've been very proactive in adjusting our resources and cost to the ongoing market demand softness. This will serve us well as demand returns to more stable levels. In addition, we've been shoring up our balance sheet, lowering inventory levels by over $150 million and generating significant positive cash flow. Finally, last night, we announced a streamlining of our manufacturing footprint with the closure of our Tampa manufacturing facility, which I'll discuss more in a moment. But from a strategic perspective, this move will both drive efficiency for the future and will help provide the necessary dry powder to meaningfully invest in growing the core business, which we intend to do. Collectively, we believe this series of strategic moves will position us very well for the future. As I…

Thank you, and good morning, everyone. As Ric mentioned, our decision to close the facility in Tampa was very difficult and I echo his gratitude to our team in Florida. This decision did not impact the first quarter and it has not changed our outlook for adjusted results for the full year. We will, however, be incurring additional restructuring expense, which I will outline in a moment. Net sales for the first quarter were $374.3 million. Foreign exchange had less than a 1% impact on sales in the quarter. The gross margin rate in Q1 was 6.3%, a 180 basis point decline compared to the first quarter of fiscal 2024, with the decrease coming from lower absorption, a result of declining sales. As we continue to right-size the company, we should see a pickup in gross margin in the coming quarters. Adjusted selling and administrative expenses in the first quarter were $11 million, a $3.5 million or 24% reduction compared to the $14.5 million we reported in Q1 last year. The decrease was driven by our efforts to align discretionary spending with current market demand and lower bonus expense, along with only one month of expense from AT&M in the quarter. When measured as a percentage of sales, adjusted selling and administrative expenses were 2.9%, a 40 basis point improvement compared to 3.3% in Q1 last year. Adjusted operating income for the first quarter was $12.6 million or 3.4% of net sales, which compares to last year's adjusted results of $21 million or 4.8% of net sales. As a reminder, we have adopted the industry norm of excluding stock comp expense from the calculation on this metric. The results from last year has been recast to reflect this change. Other income and expense was expense of $6.2 million, virtually flat…

Thanks, Jana. Before we open the lines for questions, I'd like to share a few thoughts in closing. With fiscal 2025, representing another year of controlling what we can control, our decision to leverage capacity within our global footprint and streamline our operating structure will improve our competitiveness and drive efficiency. The closure of the facility in Tampa aligns our electronics manufacturing footprint in the U.S. with current and long-term market demand and positions the company to better utilize our facilities in low-cost regions. However, we also recognize that we cannot cut our way to greatness and that controlling what we can control means also focusing on top line growth. We continue to actively pursue new opportunities where our core manufacturing capabilities support emerging technologies, most notably in medical high-level assemblies and drug device combinations. With our strategic focus on EMS operations and a strong balance sheet that now supports different avenues of growth, we have intensified our efforts on where and how to profitably grow. Last quarter's announcement by our largest medical customer making Kimball the sole supplier on the Respiratory Care Final Assembly and HLA business is a great example where we see the opportunity. I'm excited for the future of the company, and thank you for your support. Operator, we would now like to open the lines for questions.

[Operator Instructions] Our first question comes from Mike Crawford with B. Riley Securities.

Thank you for giving us all that detail on the Tampa Bay facility. Can you remind us what it's on the books for currently? And again, clarify whether the proceeds that you expect from selling the land and the building just exceeds this $8 million to $11 million you're talking about or the book cost as well of the land and building?

Yes. So what we have on the books for is considerably less than what we would expect to sell the building for. And so our estimate for the price that we could batch for the land and building is somewhere around $18 million to $20 million, which significantly exceeds the exit cost. It's more than -- it's roughly 2x the exit costs we expect. .

And then Jana or Ric, could you maybe help us look at the business by vertical market and maybe characterize where the life cycle is of the majority of the programs within there, whether they're programs that started out NPI are still ramping up for years to come or if they've been in production for years and maybe are starting the long tail decline.

Okay. That's an interesting way to look at it.

No, he's trying to figure out the portfolio of revenue, which I appreciate, Mike. So Industrial has the shortest life span and probably the most NPIs that you're going to see particularly over the next 24 months. And then we've got three fairly significant programs ramping in automotive over the next 18 months that are going to actually bring down the average life of that portfolio, one in Poland, one in China and we announced the braking program that's coming on in Q3 in Romania. And then in Medical, Medical has a really nice steady stream of business coming on over time. And so the life of that portfolio tends to remain fairly stable in the five to six year range.

Okay. And just one more for me. So I know you've been studying potential adjacencies where you can find new avenues of growth, such as, I don't know, the off-highway equipment market. Is there any tangible progress there or any further focus on exactly what you might -- what works promising at this point?

Yes. We haven't disclosed any specific wins, Mike. But the -- what I would say is the as we've sharpened our focus on -- and again, this isn't all new things, right? I mean these are areas that we continue to monitor to see -- is this the attractive space that we want to be in. such as braking and steering and automotive, which we continue to believe, areas like domain controllers, energy storage, off-highway equipment and particularly auto injectors and medical are those spaces where, I guess, I would characterize it as our level of discussion and quoting and readiness for investment is very high and we're quite optimistic. Those obviously take time to ramp up. So we don't have any specific win that we can disclose at this point based on our agreements with customers, but we're really pleased with the activity and also the long-term attractiveness of some of those spaces.

Our next question comes from Jaeson Schmidt with Lake Street.

You noted sort of the elevated inventory in auto. Just curious what sort of visibility you guys have to that sort of clearing out? And how should we think about the potential time line?

It's a great question, Jason. What we do is we drive around and we see how many closed malls have lots of cars in there as holding stations. Now we're obviously in close touch with customers all the time about what they're seeing in demand. We update our demand regularly. To your point, we have seen this sort of inventory glut that has persisted for a period of time. And so we adjust, we see ups and downs, but I wouldn't say we say it's a quarter from now, it's 2 quarters from now when this opens up. It's something that we have to monitor and try to get ahead of as best we can and adjust to. So I don't think we have a clear line of sight to that demand stability, but we're on it.

That's more than fair. And how should we think about gross margin trending? Obviously, it's going to be sort of revenue dependent, but any help on sort of the trajectory for the remainder of fiscal '25.

Yes, Jason. And it's something that we have -- that's where I'm spending the bulk of my time, right? So revenue by geographic area and the rightsizing and restructuring that we're doing. So dependent upon revenue and also dependent on how quickly we can drive the cost out of the facilities. And the challenge with that is to your previous question, when do we see volumes start to return in the space and what's the measured approach of cost containment versus being ready when demand comes back. So what I can tell you is gross margin of 6.3% is disappointing to everyone. It's something that we've been after. We had $2.3 million of restructuring costs in the quarter, expect restructuring costs in Q2 to be similar to that in terms of rightsizing the workforce for the demand that we see. And so I would expect a measured improvement in Q2 and more significant improvement in the back half of the year.

And then just the last one for me, and I'll jump back into queue. Should we consider September to be the low watermark for the year from a revenue perspective?

Well, if you look at the guide, and I realize I just gave it to you so you probably can do math on the slide. We're seeing Q2 decline in line with Q1 decline quarter-over-quarter, which would indicate that Q2 revenue would be just slightly below Q1. And as indicated. And so that would say to me that likely October is probably the low watermark. And I may have just closed.

[Operator Instructions] Our next question comes from Anja Soderstrom with Sidoti.

I just want to clarify, when you talk about the sequential decline in the second quarter to be on par with the first quarter. Is that by dollar amount?

By revenue, yes. But with improved gross margin.

Yes and operating margin, right. And then I'm just curious to follow-up on the inventory in the auto. Do you -- do you have a lot of inventory there because of the falloff from that program? And is there any remedy you can get from your customer there?

Automotive has the longest lead time of inventory -- and here's why that's challenging. You ordered 12 months from now. And remember, a year ago, we were ordering 18 months from now and before that much further out as we were dealing with supply chain challenges. So you order and then six months after you've placed the order and the inventories coming the demand drops and you get the updated demand from customers. And so auto inventory is the most challenging to deal with, right? So what can you cancel, what can you push out to align with the demand that has a 6-month lag associated with it. At the end of the day, you will work with your customers to right-size it. And so it becomes a timing issue of just that inventory and the corresponding cost of that sitting on books. We're getting better at faster demand signals, but we're going to see the impact of it creep up on us over the course of the year. We're managing it as effectively as we can, though.

Okay. And just follow-up, as you mentioned the program cancellation. We are certainly working with that Tier 1 customer on recovery and how we work through the wind down of that program. So yes, but that's still in process.

Yes, we'll fully recover the inventory.

That was helpful. And then the $11 million in the exit cost, is that going to fall more in the back half of the year or.

We will begin the process immediately. And so I will tell you that we've contacted all of the customers, we're in process. And so I would expect to see some of that cost come through in Q2.

Okay. And have you quantified what kind of savings you expect to get from that closure?

I expected this question. We have not disclosed the savings. What I can tell you is when you figure out the depreciation, the indirect labor, the administrative overhead burden of closing a facility you will absolutely feel it on the consolidated. It would be a meaningful pickup to North America and certainly to the consolidated enterprise. If you will be patient with me I would like to -- when we report Q2, that's when we'll give you more information.

But as you would expect, the utilization of those other North American facilities that are going to receive transfer will improve as a result.

This concludes our question-and-answer session and does conclude our conference call. A telephone replay will be available shortly. To access the replay, please dial (877) 660-6853 or (201) 612-7415 then enter the access ID1 13749564. You may disconnect your lines at this time. Thank you.