Q4 2020 Key Tronic Corp Earnings Call
Excuse me, ladies and gentlemen, thank you for your patience and holding the conference will be getting momentarily again. Thank you for your patience.
The conference will begin momentarily.
[music].
Good day and welcome to the key Tronic Q4 fiscal 2020 conference call Today's conference is being recorded.
This time I would like to turn the conference ever to Brent Larson. Please go ahead Sir.
Good afternoon, everyone, Brett Larsen Chief Financial Officer key Tronic.
I would like to thank everyone for joining us today for Investor call.
Joining me here in our Spokane Valley headquarters is Craig gates, or President and Chief Executive Officer.
As always I would like to remind you that during the course of this call we might make projections or other forward looking statements regarding future events, where the company's future financial performance.
Please remember that such statements are only predictions actual events or results may differ materially.
For more information you May recall, you May review the risk factors outlined in the documents the company as filed with the FCC specifically, our latest 10-K quarterly 10-Q's in a case.
Please note that on this call, we will discuss historical financial and other statistical information regarding our business in operations.
Some of this information is included in today's press release and they recorded version of this call will be available on our website.
Prior to getting into the details of the results of the most recent quarter I would like to give Craig sometime to address this past fiscal year in a series of it unanticipated events that impacted key tronic its fiscal year 2020.
Okay. Thanks, Brett.
2020 ones, a euro significance than usual challenges that rewards for key tronic.
The dedication encourage or employers.
The support of our customers, both near and long term.
And the strategic decisions. We've made both recently in years ago enabled are promising exit fiscal 2020.
Encourages us really coming year.
The began to you the trade war between U.S. in China, which was layered on top of persistent worldwide supply pitch for electronic components.
Due to the long hours and extreme effort of our materials groups on both sides of the Ocean. We worked our way through most of the supply issues, albeit with painfully high levels of component inventory.
And so I missed revenue opportunities.
Oh, the trade war related supply issues hurt us in the short term it puts a risk associated with an overly Chinese centric supply chain.
In clear focus for many of our current and prospective customers.
As long as customers began to assess their options the benefits of our strategic focus on war as it used to production became clear in many of them.
New business wins results.
[noise] over the years proceeding twentytwenty our concerns surrounding Chinese centric strategies has led us to evaluate many other regions infant care plans for diversification.
As a result is this earlier works we were able to launch in commission in new facility, Vietnam, which was up and running at about seven months.
This unprecedented ramp put us in an excellent position to address the needs of customers looking for in Asia solution.
Two Chinese centric solutions.
The ramp over the next facility continues.
New business and new customers.
Just as we gain some control over the trade war supply issues over 19 hit.
Employees, where suddenly risk scientifically proven safety measures for debate.
Oh warrants facility along with many other wars facilities was closed for essentially two weeks.
Supply chain issues, which were bad are ready for enormously magnified.
Our gaming customers demand went to zero.
We implemented every safety measure we could at our facilities with old protection as our goal.
[noise] covert 19, so far isn't that positive door business, our focus on medical products over the past years resulted in a net gain in revenue as a virus drove demand.
More than offsetting the decline in other cobot affecting businesses.
Chinese centric potential customers, who are concerned but all in defense during the trade war pushed off the fence by the virus enforced in our direction.
Our sites in Juarez, U.S. and Vietnam served as a powerful risk mitigator for these customers.
Several choosing revenue business in two or more of our locations.
We enter 2021 with a forecast for growth and increased.
Okay.
That's great art work and strategic fore sight or employees supporting trust and renewed established customers.
And the support of our shareholders for that time profoundly grateful.
Right.
Thanks, Craig.
Today, we released our results for the quarter ended June 27 2020.
For the fourth quarter fiscal 2020, we reported total revenue of $116 million.
10% from $105.6 million in the same period of fiscal year 2019.
During the fourth quarter revenue was constrained as a result of the temporary shutdown of our facilities in Juarez by the Mexican government due to covert 19 pandemic and associated delays in restarting production.
Our Mexico operations were completely shut down for roughly two weeks, however, recruiting efforts to fill positions on temporary leave due to potential vulnerabilities ramping production backup improving physical distancing and other coated related disruptions continued throughout the quarter.
For the full year fiscal 2020 total revenue was 450, 449, and a half million dollars compared to $464 million in the same period of fiscal night as 2018.
Throughout much of the year, our revenue was adversely impacted by disruptions to supply chains in China caused by trade tensions and then by the covert 19 crisis, which delayed the arrival of key components and caused production delays.
We've seen most of our China suppliers come fully back online for production in the fourth quarter, but continue to see some backlog and long lead times in certain custom microchips as demand has outpaced capacities.
For the fourth quarter fiscal year 2020, net income was $1.5 million roughly 14 cents per share.
Compared to.
$800000 worth eight cents per share for the same period of fiscal year 2019.
Earnings for the fourth quarter fiscal year 2020 included a tax benefit from releasing a portion of the company's allowance on research and development credits taken in previous years.
1.3 million or 12 cents per share.
For the full year fiscal 2020 net income was 4.8 million were 44 cents per share compared to a net loss of 8 million weight loss of 74 cents per share for the fiscal year 2019.
Excluding the goodwill and intangibles right now that occurred in fiscal 2019. The company would have reported net income of 4.5 million were 42 cents per share for the fiscal year 2019.
During the fourth quarter fiscal 2020, we incurred a variety of additional costs caused by the coated 19 crisis totally totaling approximately $2.2 million or 16 cents per share.
These expenses are related to the temporary shutdown and restart of the wars facility as well as preventative measures equipment for employees across all of our facilities in the U.S., Mexico, China and Vietnam.
These include providing personal protective equipment to all of our employees restructuring the production lines to provide for social distancing and other measures.
We currently expect to occur about $1 million or seven cents per share a similar expenses during the first quarter fiscal year 2021.
But of course this is an estimate based on today's information and the assumption that the virus doesn't force future closures and that current labor constraints do not worsen.
Further the pandemics adverse impact on revenue and expenses dampened our margins for the force for the fourth quarter fiscal 2020 gross margin was 7.4% an operating margin was 0.9% compared to gross margin of 7.9% in an operating margin of one.
3% in the same period of fiscal 2019.
Without the impact of this disruptions for independent make our gross margins would have been closer to 9%.
Turning to the balance sheet, we continue to maintain a strong financial position.
As a result to production delays in the fourth quarter and the continued ramp and transfers of new programs, our inventory remained roughly flat with the prior quarter.
In future quarters, we expect to see our net inventory turns increase to be more in line with expected revenue.
Although we have a healthy balance sheet as well as flexibility in available bank debt. We still it is prudent to preserve cash were possible should depend they make again disrupt operations for an extended period.
This like we're expecting to increase our total credit facility to give us more flexibility to ramp up production in the coming months.
At the ended the fourth quarter trade receivables were up $6.1 million from the prior quarter, reflecting the increased revenue levels and the timing of shipments late in the quarter.
Our dsos remained at about 60 days.
Total capital expenditures in the fourth quarter fiscal 2020 were approximately $2.7 million, an $8.3 million for the year.
While this is less than we had originally planned to spend during fiscal 2020, we will continue to invest in our production facilities, SNC equipment and sheet metal and plastic molding capabilities as well as improvements in our facilities as we move into fiscal 2021 and prepare for growth.
For the first quarter fiscal 2021, we currently expect to report revenue of between $418 million to $125 million and earnings of approximately 18 to 25 cents per diluted share.
With that said a lot of uncertainty remains in those estimates we're working closely with our customers key suppliers and employees to minimize effects as delays attributable to the continued global pandemic.
While the company's facilities in the U.S., Mexico, China, and Vietnam are currently operating and rigorously following current health guidelines uncertainty as to the possibility of future Tim temporary closures custom demands and cost in future supply chain disruptions during the rapidly changing.
Encoded 19 environment could significantly impact operations in coming periods.
Due to the heightened risk associated with the pandemic, we may issue updated guy guidance during the upcoming quarter.
In summary, while the covert 19 crisis continues to cause disruptions in the fourth quarter and remains a risk in future periods were encouraged by our prospects for future growth.
Overall financial health of the company is strong and we believe that we are increasingly well positioned to win new gms programs and to continue to profitably expand our business over the longer term.
That's it for me Craig.
Okay. Thanks, Brett [noise].
Tony Tony was a year of both powerful global headwinds and Tailwinds.
Through much of the year, we confronted component shortages and trade disputes related to suppliers in China.
For the close of year, we face covert crisis directly which temporarily halted production in Mexico, as well as disrupted production and add costs across all of our facilities.
These are unprecedented in challenging times and this pandemic affects all of us I've been humbled by the stalwart dedication of key tronic employees as we work to manage through this crisis.
Our primary focus continues to be to ensure as best we can that our employees and their families stay safe.
Within the constraints of our efforts to keep everybody in the key tronic family healthy.
During our best to maintain production and all our facilities.
[noise], we've been taking and we'll continue to take for cautionary measures to limit. The risks are most vulnerable staff and many of our nonmanufacturing employees now work from home.
And travel is.
Very tightly restricted.
We've implemented all recommended safety measures in or manufacturing facilities.
This includes fulltime workings of face masks and face shields workstation arrangements to provide for social distancing.
How much you're monitoring.
Enhance worksite disinfection spacing and cafeterias and break areas contact management more.
Some of our suppliers have experienced temporary closures, resulting from government locked down and shelter in place orders. So far we've either been able to work around these temporary disruptions or closures have been resolved.
We're also managing transportation complexities and disruptions to our supply chain via alternative sourcing airfreight products Redesigns and alternative component qualifications.
We're closely monitoring inventories and we'll use safety stock as much as possible to ensure minimum interruption at this point in time.
We have been able to find solutions for most of these challenges.
In spite of the many challenges we faced fiscal 2020 generated strong encouraging tailwinds for our business.
Certainly over tariffs and traders tension between us and China.
Combined with disruptions caused by the pandemic have further intensified a growing consensus among many of our customers potential customers.
They see more clearly that's a total costs in RIS overreliance on manufacturing in China are actually higher than for a balance more shirt makes a supply out of China and localized supply chains.
Jordan supply chains supported by localize vertical integration are becoming more widely understood and highly desirable.
Moreover, our customers and potential customers increasingly want their IP maintain the U.S.
Where there is more enforceable ownership and maintenance on their IP.
As we've discussed before key tronic is ideally situated to benefit from these global trends moving away from reliance on China manufacturing.
A growing number of existing and new customers are transitioning from China facilities to our expanding facilities in Mexico, Vietnam and U.S.
Facilitated by our centralized command and control, we can drastically reduces risk and time associated with such a transfer.
At the very least diversifying the geographies our customers manufacturing sources allow some leeway to respond to that rapidly changing political on health landscape.
The year was a whipsaw experience between the upside of these favorable geopolitical trends and the downside of covert 19 impact on our component supply change and its effects on our operations in workforce.
By the end of year, the upside and overcome the downside.
Demand for many of our customers remain strong in the fourth quarter.
And some customers significantly increased or demand, particularly programs for health care and home oriented consumer products and exercise equipment.
Our marketplace remains very competitive we continue to win significant new business, both from BMS competitors and existing customers.
During the year, we won new programs involving consumer products electric vehicle charging infrastructure led lighting.
Hi controls for aircraft personal safety.
Well I find enabled signage temperature control devices home exercise.
And it ties are dispensing automotive controllers oil and gas drilling wireless security.
And consumer healthcare equipment.
A large program that we announced in the third quarter, which went fully ramped is anticipated to contributed 100 million an annual revenue.
Got underway in the fourth quarter and is expected to contribute to revenue in fiscal 2021.
Last but certainly not least.
We now manufacture face masks by then billions in our corn, Mississippi facility.
And high end respirators in our own build Minnesota facility.
Our broader and more diversified customer base lowers the potential future impact that was slow down but anyone customer.
Our say pipeline of new business opportunities continues to be boosted by our unmatched level a vertical integration.
Multi country footprint.
The excellence our manufacturing sites in comparison to other dms competitors of our size.
As Oems face a pandemic layered on top of an increasingly uncertain geopolitical landscape.
Uniquely equipped to offer risk risk mitigation with our vertical integration and manufacturing facilities located in Mexico, Vietnam, China and the U.S.
While we are carefully managing our expenses, we've been preparing for growth in coming periods. During fiscal 2020, we continue to invest in our facilities.
Including the expansion SMMT sheet metal and plastic molding capabilities in Mexico, and the U.S. with respect to integrate electronics and sheet metal centric programs.
We see very strong growth in very few real competitors our size in North America.
We also deployed innovative new manufacturing equipment each of our facilities, which has improved efficiencies and has made our production less labor intensive.
Solves this effort has been decreasing manufacturing and operating expenses, while making us increasingly well positioned for the returning tied up in North American based customers.
Additionally, we are continuing to ramp production in our new 86000 square foot manufacturing facility in Vietnam to augment our aging footprint and reduce production costs.
As well as provided additional hedge against uncertainty with respect to covert 19 related disruptions as China production as well as a lingering or future Phil trade Wars with China.
As we enter fiscal 2021 considerable uncertainty remains around the continuing impact of covert 19 and potential future disruptions to our workforce and operations.
There's also the related risk of a deeper economic downturn. Nevertheless, we entered the fiscal year with a positive momentum.
We continue to invest in new capacity I remain optimistic about our long term opportunities for growth.
In closing I want to thank all of our great employees for their hard work dedication during these challenging times and for adhering to our strict guidelines for precautions during the pandemic.
Let me assure you that we will continue to make protecting the health of our employees are highest priority.
I also want to wish you and your family's good health safe passage during the pandemic.
This includes the formal proportion of the presentation.
Right and I will now be pleased to answer your questions. Operator can you open the line for questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using speakerphone. Please make sure. Your mute function is turned off to allow your signaled to reach our equipment.
Again press Star one to ask a question.
Well pause for just a moment to allow everyone an opportunity to signal for questions.
[noise]. Our first question will come from deal doesn't 11 with Titan.
Thank you a I'd like to start with it and normal a question of each of the five new programs at Q1, what's the size of those.
Oh.
Lets call all between five and 20.
Okay. Thank you very much and.
Then you called out in the press release, the 2.2 million or 16 cents of Colgate costs and then on the your prepared remarks.
Thank you as a reference to seven cents a cost anticipated in the first quarter, how much of that 16 cents is recurring cost and same with a seven cents how much is recurring versus a onetime in nature.
Well I hate to seven cents, a things keep going the way. They are going is probably recurring the rest of as one time.
And the 16 cents would that imply that seven seven pennies have those 16, what would be under the recurring costs.
Yeah.
Great and then if I go back to the transcript from last quarter.
100 million dollar new customer that you mentioned last quarter, you said that that was in the home exercise equipment Arena I mean once again, congratulations that's ramping.
But it is that is that customer in what I would think of that legacy.
Exercise equipment or in a and then a new area started up or something of that nature.
Let's call it something other than legacy.
So it is I think about the newer.
Newer companies.
I can only think of two that would be large enough to to be 100 million a business that a mere and pellet on.
Uh huh.
Are you working with ER with one or are those or I guess, both of them for that matter or.
Or is it somebody different that I'm, just not even thank you know.
Oh no comment.
Okay, Let me let me switch.
A bit then so of the hundred million run rate annual run rate that would be 25 million a quarter when you're fully ramped, but you did say you began in the June quarter.
How much or how much revenue did you have from that customer or how far along in that a in that ramp process. So are you.
In Q4.
Ah we only did.
Not a whole lot, maybe maybe 2 million yep.
And just started last month in Q4.
Okay.
So how quickly are you anticipating that could move up to it for a full 25 million per quarter a run rate.
Well when you either in Q1.
[noise] so our fiscal Q1, which is the January February March quarter.
Hi, such as going up calendar, sorry, Yep calendar Q1, Bellevue and so.
Not till our third quarter right. So the next two quarters, we'll see an is somewhat of a linear ramp it if you're successful or are there certain a step function increases that you're anticipating.
Oh this ramp right now is controlled by a component availability so whether its step functions are sawtooth I don't know, but its turkey.
The.
We were ahead of the availability of components right now and I expect us to stay that way.
And when you say you're ahead of the they availability does that mean that demand is exceeding that component supply of are you trying to communicate something else.
Demand is exceeding component supply in the factories building fast enough that weve students through all the components, we get her hands on.
I understood. So if you can find more components, you'll build more basically.
Yes.
And presumably you have a line of sight on future component availability that leads to that 25 million a quarterly run rate out how it a couple of quarters.
We have a line of sight, but.
Our VP of materials offices to over for mine in every day I walk by their ito's and looking tail. So [laughter] I don't know what's going to happen.
Excellent well as long as he keeps working.
[laughter] Okay. Thank you both all let's step back in line.
Well.
Well take our next question from Orin Hirschman with AI Jie investment parse partners.
Hi, how are you.
Yeah.
In terms of actually seeing the macro trend.
Turning to actually seen the macro trend the real programs should thing.
You know away from from.
China and like countries. When do you really think that begins to make an impact a meaningful way in the numbers.
Well it is already started because [noise].
Some of those programs, we've already begun to ramp.
Our offsetting decreases that we see from gaming industry and.
A couple other industries that are being really hammered by <unk>.
So.
[noise] under the top line impact has already been very positive from that.
And.
He added.
So.
What's already begun.
And in terms of medical as a percent of total sales this quarter I'm not sure. If you mentioned the national number what was it also [noise].
[noise], so that was probably [laughter] around 15% a little bit better that 15 16, 17% yep.
But then the medical side.
Yep Yep.
And finally, you know obviously, it's a big swing if you're able to hit your target range for next Q.
You know besides component that they have availability what would you say.
The biggest issue or that's just the overwhelming issue here.
Oh.
This quarter [noise].
[laughter].
She is the availability of.
Flavor.
In Mexico.
It's probably adds or more impactful.
Component supply.
But.
As it they give you.
The percentage because like I said at any moment.
[noise] in somebody that you can longer than one part and that kills a big chunk revenue.
Most of those things are at the forefront to remind write those risk.
Is there upside if any if it's components on Mexico Lucent cost.
Yeah, there's quite a bit here, we're offering a pretty wide range. This quarter and we're telling you that we may have to come out with an update.
As we get through the quarter, because it's a big range.
Okay great.
Okay. Thanks very much.
Thanks Mark.
Well take our next question from Sheldon Grodsky Gradsky very carefully put this since I got it Okay. Let me first so start off with.
Respirators and Matt.
Uh huh.
I always say a hot area right now, where they see being made and where these things hold.
Other being made the master being made in corn and the respirators, it's actually the electronic part of a respirators being made in our Minnesota factory.
We did you say the mask.
The master being made in towards Mississippi.
Wow.
Okay, and the respirators and had Minnesota.
Yeah.
Okay.
Are these significant lies at the moment.
No I wouldn't say, we'd have to announce them. If we're going to follow the rules of significant but we think every piece is significant so.
I don't know.
Have you had any corona virus patients along your employees.
Yeah, we've got over 5500 employees. So it would be a miracle if we had not.
If you walk into our factories in war as you would be confused and thank you walked into a medical operating arena.
I am not Jochen, it's it's amazing what we've done to keep our people safe.
We are running far below the city of wars is average in terms of new cases, I think it's been four weeks since we've had a new case.
We've had.
Smattering of cases in the U.S. sites.
None in China and in Vietnam.
So we think were.
We actually think there are people are safer at work than they are at home certainly there are safer work than they are in a bar in the fourth of July Party.
What about Labor Day Party I'm kidding.
They'll go.
Yeah I'll.
Thank you.
Yep.
Well take our next question from Mike Hughes with S.T.F. capital.
Good afternoon couple of questions for you first do you happen to operating cash one of them are for the fourth quarter.
[noise] I do if you give me just a second here.
Yeah, I'm, sorry, Mike I I've got it for the year I don't have it for the quarter.
The number for you.
We used $30 million an offering activities.
Okay.
So just looking at they are and I think you look at a on contract assets. If you combine those in the June quarter in about 110 million.
And you did the same level revenue the December quarter, and they were 87 million. So there's no. This is really consuming a lot of cash so just thinking about on a go forward basis, what does operating cash flow look like and is there more intense focus on a on the inventory.
Sure. Let me, let me take that into two sections, one contract assets I would really consider more to be a finished good that's unbilled revenue.
At this stage that it's in that regardless the company is utilizing quite a bit of capital.
One nuance from the comparison that you make is that we're no longer factoring a portion of our receivables.
So that also is one of the reasons why there's such a large.
The increase in that.
We're expecting our accounts receivables to continue around 60 days Dsos 60 days.
As mentioned in the narrative, we are hoping to close on and increased credit facility very very soon.
We will allow us some additional liquidity.
To support the expected growth.
And as the current credit facility box pay or in inventories I don't works.
It's a cash flow deal.
Okay, and 65 million right now.
It is plus a 10 million dollar term debt.
Okay. Okay, and then one was there any.
Bad debt expense for the fourth quarter that there was an unusual above above trend.
No there was not.
Okay, and then the facility in Vietnam.
Can you just talk about the level of revenue, there and kind of how that ramps for the over the next few quarters.
We're expecting revenue from Vietnam to be roughly about $5 million and this quarter in our first quarter, we're expecting that to to grow slowly.
During the fiscal year.
Hey, how is the on labor situation of Vietnam at this point.
Good very good.
Okay. That's all I had thank you very much.
Okay.
Well take our next question from deal that's one it's Hanson.
Hi, Thank you I do have a few follow up question. So first of all.
When you gave your original guidance for the.
For the June quarter, before a covidien character ravages things.
You were thinking you could do a pretty big revenue number how much when you look back with hindsight waste revenue constrained a in the in the June quarter.
[noise] I'd say anywhere between.
Five and 12 million Bucks.
And in response to a at another question are you said that that.
Revenue in the a into Q1 the September quarter here you expected it will be constrained again, how much are you thinking or if you didn't have the cool good yeah I issues that you could that you could be producing and this quarter.
I don't really know how to answer that.
Can you talk about the quite correctly.
There's just there's too many factors to call it Colvin versus trade war versus I don't know.
It's there's.
I don't know how to answer.
But you you actually distributor to go down the path that I was thinking maybe we could explore which is what are the factors that are that are the impacts and and could you quantify each of them and then we can decide it's hard coded or or something or something different.
Well you got the lack of employees and wars.
You had the turnover.
Oh the employees in war is.
You had the inability to get.
One or two components that may impact some big chunk of revenue.
You have customers, who are well one actually more than one we've had a number of customers who at the beginning of the coldest crisis shuts down entirely and thought that they would get no orders and then as.
I guess the.
Social economic trends begin to make themselves Claire do.
The same customers not only turns back on again.
They went into full panic mode because.
People are doing things that they had never done before and they needed to buy product to enable those things.
So we've got a number of customers who are right. Now you know two months ago had a shut down and on right now trying to double their forecast to us.
Okay. So.
Realty to expedite parts in the midst of all this is unknown and changes every day.
It's almost impossible to find an air freight route.
HM two here.
Many of the suppliers in China are raising their prices are demanding.
Cash and a half upfront or whatever or the kind of madness, you can think of.
But it right there's enough for me to just get confused and say I don't know, there's upside, but I don't know how to.
Give me a number.
Oh, that's a that's here I'm I'm.
Equally confused so.
Good enough.
Oh, let's let's talk about a couple of things first of all you had the announcement here while ago is that you were then manufacturing technology, yeah, Yeah insight one of the top 10 insight magazine Tidier one of the top 10 CNS.
Suppliers.
What are the implications of that and to what degree do headlines or a awards like that influence existing indoor perspective customers to either work with you or or color you and put you on analyst.
I think the most that does is is get somebody's notices in the market suddenly in the market for.
A new contract manufacturer I think it's just one more away for us to get in front of a VP of purchasing from one of our perspective customers.
It does it when you are talking with a prospective customer and they I'm kind of their first introduction to you does it add any credibility to to the beginning of the relationship or do they pretty much go through their check west irrespective once they found out who you are.
None of the rest of it matters.
I'd say the latter not the former okay. That's a that's fair and then lastly, you.
You you are have one of your five new customer wins. This quarter was in wireless security and given that you has previously announced that you are working with Sky Bell.
What can you tell us about this wireless secure he customer and is there any spillover benefit from the Sky Bell.
<unk> link or or don't link those together for US if you went please.
Oh that one is a perfect example of a.
Customer with us they China centric supply chain.
Who is already experiencing some difficulties.
Before the trade war came along.
Also trade war got going.
They got really concerned about being completely China centric.
And as they got to know us decided to completely move to key tronic.
Well, that's a and that was a I don't know when all this started but anyway, that's been ramping for quarter.
And.
There may be a lake at some point with them, including skibo product in their offering.
Right now the only advantage that we received with this new customer from being a supplier to Sky Bell.
Was the fact that we are in that market and I understand it's it's vagaries and that actually carries a lot of weight with customers if you're in their market. It gives them a pretty.
I agree that confidence you understand what they're going to go through.
All right I'm going to have a little fund here. When he then given given that I think just this week is that 80 tea.
Now, it's that Google was investing 450 million or something into a into their business.
So is there something happening here in in this market that that that we should all be thinking about that's really a really relevant to you all in and where does 80, 80 tea and or Google fit into a a the key tronic ecosystem.
[noise] Oh, let's see I think the first part of that question is part of the overall.
I guess unanticipated unexpected changes being driven by.
Both coated and the maturing of the Aiotv.
Internet of things space.
You know 15 20 years ago, everybody was talking about the smart home blah blah blah, nothing really happened.
And now, it's becoming more and more possible to have a smart home without running a bunch of wires. So in general I see.
As apparently Google does a lot smarter than we are so maybe they see something else, but I see that.
The smart home Internet of things.
The marriage of once you can do once you're in the home is becoming a lot cleared to a lot more people. So the folks that are on the.
Oh, sorry, penetrating into the home like easy alarm dot com other people.
They are there a lot more interesting than they used to be because there's a lot of money being spent on.
Virtually wiring couple of halls.
So I think that's the overall trend.
I think it's being accelerated by the fact that people are stuck in their homes quite a bit more than they used to be so they want them to be cooler and work better worse before it was you know you can live when he convenience now you're there 24, seven and something that was just stupid before now really bugs, just so youre willing to spend some money to fix it.
But.
Go ahead no. Please after you.
Well, that's the first part of the question and the second part was how does 80, t. and Google fit into our.
Key tronic.
Space.
A little bit right now I don't know how much in the future.
[noise] and so because you you have these customers that you are already now working with a and you you said that.
They have a lot of credibility when you're already in a in a space.
Does this imply that this is potentially a future.
Oh, I guess someone else use this term on the call, but a future hot area for you or soon to be hot area for you.
Or do you not see this be coming in a Ah hey, a much larger pieces of your overall revenues.
I don't know.
We'll see.
For sure every time, we get a little bit better or something and we get a little bit more penetration into the market.
You know business follows business, So we'll see.
Certainly the people in that industry know, who we are though.
Okay, Congratulations and thank you for taking all the questions.
You bet, though.
Well take our next question from towards me less.
Each management.
Hi, guys, good afternoon, [laughter] doors and <unk>.
[laughter].
[music].
Question on the gross margin I.
I think that.
Brett you find to stand right you said that.
Without the disruption related to cope with 19.
Gross margin was close to 9%.
So it doesn't get was up 2.2 million or is it maybe 1.8 or close to that is what is related to the cost of goods. So.
That helps journey about it.
Yeah, George that the bulk of that is cost to goods. When I mentioned I personally I was just a round number.
Run numbers, Okay is there way I can tell us exactly how much of the 2.2, you would attribute to cost of goods.
A 2 million of the two to 2 million okay great.
So that puts you gain a gross margin at a gross margin level.
You haven't.
You haven't been in quite a while.
And can you sort of great can maybe help us understand how gross margin has gone.
Back to 97, and like any state dot and that's at least I didn't know level. These elevated investment not it.
Over the last few years.
Yes.
[laughter] says is that a lot of question are there sure there [laughter] like I like get better as the other way around [laughter] I know so but that is answer we spent two or three years as we say just about every quarter investing in automation.
We have continued to drive the.
The integration of the east into the Wests.
The.
Site in Vietnam is coming online nicely.
We are becoming more efficient in war as.
We were helped by the exchange rate.
We were hurt by the death of gaming.
They also it's all these things mixed together, but in the end it's.
It's the result of.
A long pole of working to make this better.
Oh I can't tell you what's going to happen.
Going forward, but.
It sure seems to me like all the best we placed in the last 10 years or.
Not China centric.
On vertical integration.
On engineering services.
Oh and streamlining our facilities.
On capital equipment in our facilities.
Oh building out ours, our sales channels.
All these things are working a lot better.
As they should overtime when you apply consistent pressure effort tool and you get lucky or you have foresight.
And people wake up and realize that they shouldn't have every one of their eggs in one basket.
Right, Okay, let me try to ask about.
New program. So if you look at <unk> <unk> since the one new hold it seemed a last 12 months.
What is your expectation of gross margin contribution for hobbies subs.
What what maybe it's the gross margin sort of you did improve.
Because of your automation and there's always that really upside from Miami too.
Pseudo neutral.
The gross margin on the most of those new programs is around the 8% to 9%. So we are able to win programs now at or slightly better gross margin than we were in the past.
This is if you look back over here.
I look back over the year I haven't actually gone back and checks I should but.
I'm almost positive this is by far the biggest number programs we've won and for sure. This is the most revenue when you add it all together that we won in any year since I've been here.
Okay.
And now maybe just one last question if you looked at Gorgon imagine you want a program today.
And you expect it didn't happen eight or 9% gross margin insight years.
Do you expect that gross margin should remain high decline coming through and what impact that.
Well, that's a pretty big question. So you can check me off when you get tired of the answer.
But.
What typically happens in contract manufacturing is.
You are forced to.
Drive it pretty hard deal in order to when the business.
And you hope that over time, you can drive youre deficiencies.
And you can put pressure on the suppliers overtime with the components and get your margin back up to the target that you would like to be.
So that side equation says that you know if you take it in it seven you're hoping you can drive it up Tonight.
At the same time, a lot of it depends upon the age of the product that you take on so if you win some product its mature that has a lot of through whole components on it.
Lot of the components are going obsolete and the customer doesn't want to spend money to redesign. It then you got the opposite pressure going on because.
You are trying to buy parts in a sellers market and you can't really put a lot of fresher on a component suppliers and already drive departs down.
So the answer to your question depends on how hard we had to compete in the first place to win it it depends on the age and maturity of the product that we won.
Depends on the psychological or cultural makeup of the customer.
Some customers believed that.
A partnership is the best way to overall make the most amount of money and so we may make a little bit more margin, but overall saved them more money.
Other customers take the old school purchasing approach and think that they should go into an EBIT process and bid. This thing out every six months.
That's all those things come together make an impossible for me to give you a simple answer to your simple question.
[laughter].
I think that's been recurring pattern over many years explained it [laughter] if it was easier if it was easy.
Yeah, I was glad to hear.
Yes, you win programs had eight to nine.
And it seems like quite a few of those programs not much when it was we're not sort of.
Age program that shape.
The hope is that it's eight to nine.
But over the next couple of years for three years.
Yeah of course, that's though it's always the hope.
Okay, but the cobiz based on possibilities so there's the possibility.
Realistic.
It is a realistic hope I will grant you that.
Great good glut and done a good.
Okay. Thank you.
Yes, it George.
Once again, if he would like to ask a question. Please signaled by pressing star one well take our next question from Sheldon Grodsky Grodsky associates.
Oh My question was covered by one of the other question.
Great. Thanks.
At this time, we have no further questions I'll hand, it back to our speakers for any additional comments.
Okay. Thank you again for participating in today's conference call I Hope all of you and your family stay healthy insane.
Right and I look forward to speaking with you again, thanks, Evan today.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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