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 2018 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, February 8, 2018, 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, 2017, 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 the call over to Don Charron. Mr. Charron, you may begin.

Thank you, Michelle, and welcome everyone to our second quarter conference call. Our earnings release was issued yesterday afternoon on the results of our second quarter ended December 31, 2017. We have posted a financial summary presentation to accompany this conference call. The presentation can be found on our Investor Relations Web-site within the Events and 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 will turn it over to Mike for the financial overview. After that, we will answer any questions that you may have. Our sales in the second quarter of fiscal year 2018 were up 2% from the previous quarter and up 12% when compared to the second quarter of fiscal year 2017. Double-digit year-over-year growth in our automotive and medical end market verticals helped us set a new quarterly sales record for the eighth consecutive quarter and kept us on pace to exceed our long-stated goal of $1 billion in annual sales in this fiscal year 2018. As we stated last quarter, our compound annual growth rate or CAGR was approximately 8% over the past three fiscal years and our goal is to sustain this growth rate over the next few years through fiscal year 2020, as we look to grow the Company beyond $1 billion in annual sales. Our margins improved slightly in the second quarter of fiscal year 2018 when compared to the first quarter of this fiscal year. However, we are still below our new operating income target of 4.5%. We expect to make sequential incremental improvement toward achieving our new goal as we continue to drive actions to improve our yields and throughput margins…

Thanks Don. During my comments, I'll be referring to the slide deck Don mentioned, which can be found on our Investor Relations Web-site, within the Events and 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 second quarter net sales were a record $258.2 million, which was a 12% increase compared to net sales of $230.3 million in the prior year second quarter. Partially assisting in the increase from a year ago was a favorable exchange rate movement which affected our net sales growth by 3%. Slide 4 represents our net sales mix by vertical market. Comparing our net sales by vertical to the same quarter a year ago, net sales in our automotive vertical were up over 20% compared to a year ago to a new quarterly record of $116.4 million. The increase from a year ago was largely due to the ramp-up of new program introductions and strong demand in North America and Europe. While our China automotive sales were down year-over-year, we did see a nice improvement sequentially from the prior quarter. Our medical vertical was up by double digits compared to Q2 last year, primarily from the ramp-up of new programs. Our industrial vertical was up from a year ago as a result of the continued ramp-up of new product launches related to smart metering devices as well as increased demand for our climate control products. Lastly, our public safety vertical was down by double-digits from the prior year second quarter as a result of lower overall demand. Our gross margin in the second quarter, reflected on Slide 5, was 8.1%, which was down from 8.9% in the same quarter last year. However, our gross margin did…

[Operator Instructions] I am showing we have a question from Hendi Susanto with Gabelli & Company. Your line is open. Please go ahead.

First question, it's good to see strength in automotive, and you mentioned there is some ramp-up of new product introductions, where are we in terms of the ramp-up? Do we still have some leg for further ramp-up for the next several quarters or the ramp-up may have reached some kind of the final stage?

No, we still have programs that are launching for the remainder of this fiscal year, Hendi. So, we are quite busy in launch mode. I would say though, pretty similar activity level as we've had over the last four or five quarters. So, we still have two or three quarters ahead of us, so it look a lot like the last four or five quarters in terms of ramp-up activity in automotive.

So, will that imply that further sequential growth every quarter?

Hendi, we don't give guidance as you know on our sales projection, but certainly as we ramp up new programs in automotive and we launch those programs, there's a certain amount of visibility and predictability that we do have given just the characteristics of that end market vertical. So yes, we would expect continued strength in automotive because of our existing base combined with the new program launches that we have going on ahead of us, yes.

Okay. And then, Mike, you mentioned that the 21% tax rate will kick in 2019. Is that fiscal year 2019 or calendar year 2019?

The fiscal year 2019, Hendi.

Okay. So, Q4 will still see the same tax rate as in Q3?

Similar, yes.

Okay. And then how much of a drag now the ramp-up of your Romania facility?

How much was the impact?

Yes, on the operating margin.

It's been running around 40 to 50 basis points on our operating income line, Hendi. And as I said today in the Webcast, we believe the phase of ramp-up that we're in is on track and that we will be approaching our breakeven on the operating income line in the fourth quarter of this fiscal year.

And that would you be able to tie up when you start breakeven, how much utilization, let's say like qualitatively?

Can you repeat that, Hendi? I don't know if I caught you.

When you said that you are targeting breakeven in your Romania facility by the end of fiscal year 2018, how should we relate that to let's say the utilizations?

The utilization of the operation?

Yes.

So, yes, we would put our utilization somewhere in the 55% to 65% range at that point in time. And again, that would be for the Phase 1 of the Romanian facility. So, we would still have our further expansion plans available to us, which is important to our European customer base, but the current structure would be somewhere between 55% and 65% utilized as we exit the fourth quarter of this fiscal year.

Okay. And then, Don, can you share what kind of business insights for every vertical that you are expecting for the March quarter?

Can you ask that again, Hendi? I'll make sure I understood your question.

Okay, like the business environment for your different verticals for the March quarter?

Yes, I think we exited Q2 with obviously some pretty good momentum with 12% overall growth, and of course automotive and medical both together leading the way with very strong growth. We feel that momentum coming with us into the third quarter of our fiscal year. So, yes, I would say across all four end market verticals, we are seeing some good momentum, maybe with the exception of public safety which is a little bit lumpier for us, it's our smallest vertical, but when we look at automotive, medical, and industrial, we carry some good momentum with us out of the second quarter of our fiscal year 2018 into this quarter that we're currently in.

Okay. And then last question for me, how should we think about share buyback in fiscal year 2018? You did lot of share buyback of like 22 million in fiscal year 2017. Should we expect like a similar magnitude?

There's a number of factors that play into the buyback program, obviously the market conditions, other options of investments that we have available to us, our current operating environment, a number of factors that will weigh into it. We have approximately $19 million left on the Board authorized buyback program, and so we certainly will continue to keep return to our shareowners through the buyback as part of our shortlist of priorities for capital allocation as we go forward. As I mentioned in my closing, we are really excited about our Board-approved updated strategic plan and we do see ourselves looking at making future investments to support that updated strategic plan. And so, certainly as we think about capital allocation and priorities going forward, some of the things we want to do relative to our updated strategic plan will be priority items on that list.

Got it. Thank you, Don. Thank you, Mike.

Our next question comes from the line of Chase Basta with AWH Capital. Your line is open. Please go ahead.

Can you help us understand the cash implications of the deemed repatriation tax charge?

Sure, I can talk a little bit to that. The deemed repatriation calculation, as we mentioned, it was a pretty significant expense that we booked in the quarter. But the payment schedule on that to the government is over an eight-year period. So, the first five years 8% of the balance is due, and then in the last three years it goes to 15%, 20% and then 25%. So it's kind of a back-loaded effect. And so we'll see that effect in our cash flow over the next eight years.

Okay, that's helpful. Then you guys, you mentioned that the Romania headwind in terms of its impact on the gross margin was around 40 to 50 basis points a quarter. What needs to happen to get to breakeven? Do you need new customer wins or is the order book built, I mean what needs to happen along the way to kind of ramp to breakeven in Q4?

It's top line growth, and I think the good news we had reported there is that we feel like we've got good visibility to that growth in Q3 and Q4 this fiscal year. As you may recall from previous quarters, we talked about how critical it was to get customer approvals and to get to validation protocols, and therefore have a predictable ramp ahead of us. We've done that for the most part. We've got a very predictable ramp ahead of us. That's what gives us confidence to say that we're on track as we ramp up Q3 and Q4 to approach our breakeven point on the operating income line in the fourth quarter of this fiscal year.

Okay, so you hit breakeven in Q4, so Romania goes from being a negative 40 to 50 basis impact on operating margin, but how should we think about how additive that could be kind of once you're on the other side of breakeven?

It's hard to say because on the other side of that we've got more work to do to secure more business wins and to continue to ramp-up in Romania, but as we look at the quarter we just finished at 3.9% operating income, we feel like with the work we're doing getting Romania to operating income breakeven in the fourth quarter this fiscal year, basically holding serve everywhere else in our Company, in our footprint, we could be approaching our goal of 4.5% operating income at the same time we get Romania to breakeven.

Okay, that's helpful. Thanks guys.

[Operator Instructions] I'm showing no further questions at this time and I'd like to turn the conference back over to Mr. Don Charron for any closing remarks.

Thank you, Michelle. 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. 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 great day.