Q1 2021 Key Tronic Corp Earnings Call
Only 10-Q's and 8-K.
Please note on this call, we will discuss historical financial and other statistical information regarding our business and operations.
Some of this information is included in today's press release and the recorded version of this call will be available on our website.
Today, we released our results for the quarter ended September 26, 2020 for the first quarter of fiscal 2021, we reported total revenue of $123.2 million up 17% from $105.3 million in the same period of fiscal year two.
2020.
The increase in revenue was due to successful ramp of new customer programs and increased demand from existing customers. However.
However, partially offsetting the increase in revenue during the first quarter of fiscal year 2021.
Revenue was constrained by labor shortages at our facility in Juarez due to COVID-19 pandemic and the cost of public health measures implemented as a result of the pandemic.
During the first quarter of fiscal year 2021, we incurred additional costs caused by the cold with 18 crisis totaling approximately $1.4 million.
Or 10 cents per share.
These expenses are related to increased compensation and our warehouse facility in order to attract and retain employees, we need to manage our growth.
As well as preventative measures and equipment for employees and all of our facilities in the U.S, Mexico, China and Vietnam.
Depend MX adverse impact on revenue expenses also reduced our margin and earnings.
For the first quarter of fiscal 2021 gross margin was 8.1% and operating margin was 2.3% compared to gross margin of 8.8% from an operating margin of 2.4%.
In the same period of fiscal 2020.
For the first quarter fiscal year 2021, net income was $1.7 million or 16% 16 cents per share compared to 1.1 point $6 million or 14 cents per share for the same period for the same period.
Fiscal year 2020.
Turning to the balance sheet, we continue to maintain a strong financial position.
As a result of labor shortages, and our wars facility, causing production facilities in the first quarter fiscal 2021, and the continued ramp and transfer the new program.
New programs, our inventory increased 4% from the prior quarter in.
In future quarters, we expect to see our net inventory turns increased to be more in line with expected revenue.
At the end of the first quarter of trade receivables were up $5.4 million from the prior quarter, reflecting increased revenue levels and the timing of shipments late in the quarter.
Overall, our dsos increased to be about 64 days.
Overall overall, we have a healthy balance sheet with total working capital of 140 154.
Million dollars and a current ratio of 2.5 to one.
Nevertheless, we feel it is prudent to preserve cash where possible shift dependent make again disrupt operations for an extended period.
Yes, slightly increased our total credit facility up to $98 million and manage pandemic risk and give us more flexibility to ramp up production in coming months.
Total capital expenditures in the first quarter of fiscal 2021 were approximately $3.2 million and we expect capex to be about $8.5 million for the full fiscal year.
While we're while we are keeping a careful eye on expenditures during fiscal 2021, we plan to continue to invest in our production facility.
On t. equipment and sheet metal and plastic molding capabilities as well as in efficiency.
Efficiency improvements in our facilities as we prepare for growth.
For the second quarter fiscal year 2021, we currently expect to report revenue of approximately 125 million to $135 million and earnings of approximately 15 to 25 cents per diluted share.
That said there is a lot of uncertainty surrounding these current estimates we're working closely with our customers key suppliers and employees the minute minimize the effects of delays attributable to the continued global pandemic.
While our facilities in the US Mexico, China and Vietnam are currently operating and rigorously. Following current health guidelines uncertainty has the possibility of future temporary closures customer fluctuations in demand and cost and future chip supply chain disruptions during the rapidly changing colder than TV.
Firemen could significantly impact operations in coming periods.
Due to the heightened risks associated with this pandemic, we may issue updated guidance during the upcoming quarter.
In summary, while the Coca 19 crisis continues to cause disruptions.
During the first quarter and remainder risk in future periods. We are encouraged by our continued growth as we move into the second quarter fiscal 2021 and by our prospects for future growth.
However, the overall financial health of the company is strong and we believe that we are increasingly well positioned.
To win new Dms programs continue to profitably expand our business for the longer term.
From a freight.
Okay. Thanks, Brett.
We're pleased with the successful launch of new programs.
Rebounding customer demand and our strong revenue growth in the first quarter of fiscal 2021.
While some of our customers continue to reduce demand due to the pandemic and related economic slowdown.
Several customers significantly increased demand in the first quarter of fiscal 2021, there including programs for healthcare industrial controls and telecommunications.
During the quarter. We also won new programs involving audio and video editing systems indoor air quality systems utility meters warehouse management.
And automation technologies.
In spite of the trade disputes between us in China, and the worldwide supply uncertainty for electronic components.
Our China facilities are fully operational again, and we saw increased demand from some China based customers.
Uncertainty over trade tensions between us and China combined with the disruptions caused by the pandemic have further intensified a growing consensus among many of our customers and potential customers.
As they see more clearly if the total costs and risks.
Our over reliance on manufacturing in China are actually higher than for a more balanced mix of China and localized supply chains.
Shortened supply chains supported by localized vertical integration are becoming more widely understood and highly desirable.
Moreover, our customers or potential customers increasingly want their IP maintain in the us where there is more enforceable ownership.
As we discussed before key tronic is ideally situated to benefit from these global trends are moving away from over reliance on China manufacturing.
We continue to invest in our Mexico in U.S. facilities. Furthermore, our new facility in Vietnam continues to ramp up with new business and new customers.
These new customers are putting their business in our reentry facility without the normal prerequisite facility audits, which further demonstrates the demand for supply alternatives to China.
A growing number of existing and new customers are transitioning from China facilities to our expanding facilities in Mexico, Vietnam and the United States.
Facilitated by our centralized command control.
We can drastically reduce the time and risks associated with such transfer.
At the very least diversifying the geographies of our customers' manufacturing sources allow some flexibility to respond to the rapidly changing political and health landscape.
Moving into the second quarter of fiscal 2021, the COVID-19 crisis continues to present macroeconomic uncertainty and multiple business challenges.
But we continue to see the favorable trend of contract manufacturing returning to North America, but.
Potential customers, who were concerned during the trade disputes last year has been further pushed in our direction by delays and uncertainties related to the virus.
At the same time, we remain focused on protecting the health of all of our employees by adhering to current health guidelines as well as increasing retention of available employees.
As Bret noted we are incurring increased expenses related to the pandemic pandemic, including increased wages and bonuses at the Orange facility in order to attract and retain employees that we need to meet our growing demand.
As well as preventative measures and equipment for our employees at all of our facilities in the US Mexico, China and Vietnam.
While our supply chain remain vulnerable to temporary disruptions caused by a flare up of the virus and associated walk down the regulations.
We previously been able to work around temporary disruptions or closures. We've also managed transportation complexities and disruptions to our supply chain we.
The alternative sourcing airfreight.
Product Redesigns and alternate component qualifications.
We are closely monitoring inventories and we'll continue to use safety stock as much as possible to ensure minimum interruptions.
Nevertheless, while we've been able to find solutions for most of the cold weather related challenges to date clearly.
Clearly none of US are out of the awards with respect to the global pandemic.
In closing I want to once again, thank our great employees for their dedication during these challenging times and for adhering to our strict guidelines for social distancing.
Wearing the masks and other recommended precautions during the pandemic.
Because of the courage hard work and strategic foresight, we expect continued revenue and earnings growth in the second quarter and we continue to invest in new capacity prepare for long term growth.
Let me assure you that we will continue to make protecting the health of our employees our highest priority.
I also want to wish you and your families good health and safe passage during the pandemic.
This concludes the formal portion of our presentation, Brett and I will now be pleased to answer your questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
If you are using a speakerphone. Please make sure your mute button is turned off the line your signal to reach our commitment.
Once again, everyone. Please press star one if you have a question we'll go to Bill Dezellem Titan capital management.
Okay. Thank you.
We start with my normal question, what is the size of each of the five new program wins that you had in the quarter.
667, 10 and $11 million.
Six 610 and.
In 10 and 11.
Pick six 710 and 11.
Excellent so all of them between five and 11 million.
Yep.
Great. Thank you and.
Would you talk.
About each of these five in terms of new customer versus an existing customer, adding a new program any unique insights that any of these that particular wins.
Ill.
Sure.
When we get back on that page all right.
So in order that I read them audio and video video editing.
His new.
Indoor air quality systems.
He is a recently new customer, but a program win.
Utility meters is a customer that left us about two years ago and has returned.
Warehouse management is an existing customer with a new program.
And automation technologies.
Our.
Existing customer with a new program.
And besides the insights to returning customer what other interesting.
Insightful aspects are there any of these to help us understand you all better.
Yes.
So the right customer left us for much larger manufacture and experienced.
The normal problems with that.
And that is a mismatch in their program size versus their chosen contract manufacturer.
In many cases.
Very large contract manufacturers.
Great job of marketing to a smaller customer.
But.
Once a business relationship begins things don't work out the way they were intended to workout and we end up with the business back.
This is pretty common.
For us.
It's not all that common that we lose the customer but it is common that we win a customer who's and.
Unhappy with a relationship with a much bigger contract manufacture than us.
The other three.
Before.
The new customer is.
Bringing normal situation.
Coming back from China.
The second one is a.
Coded driven demand.
That caused a pretty small customer with some pretty cool technology to see significant increase in demand.
And we made the obvious we are the obvious choice for them to expand.
So that's about it from insightful reasons as why we have these new customers and programs.
Great. Thank you and then.
In the press release and your opening remarks, you did reference the increased demand from existing customers in healthcare industrial controls and telecom, which we can talk about that increase demand for each of those.
And.
Insightful perspective please.
Well.
These are all examples of demands that has increased.
Customers have experienced increased demand.
Due to some time is not expected.
Second or third order effects of the co would crisis.
So.
On one side of the equation, we have the gaming customers dropping dramatically on the other side of the equation we have.
These customers.
Increasing in the demand.
In strictly due to what people need at what during the cold with crisis.
So on the whole I'd say that.
While we.
Our profit aim so I guess that makes us a co with profit tier from some of these customers on the other side were being harmed in a big way.
Well I'd say, the net effect of coal that it's probably neutral and key tronic.
Are you able to discuss any of the specific products, maybe without the customer names, but the products that you are seeing this increased level of demand for.
I think that.
All right I'll move on then.
Also your labor constraints would you please talk to through those in terms of.
What you experienced in the quarter and maybe more importantly, the view on.
And labor going forward, particularly given that you are talking about.
Increase in the business, which I suspect means an increase in.
Employees.
Yes, the labor situation at.
The end of our fourth quarter and the beginning of the first quarter.
Ed started to improve pre.
Previous to that we.
We had had over 550 people that were.
Not allowed to come to work due to pre existing conditions in juarez.
And so we had a 550 person hole to fill and that was that our steady state revenue and then when you look at trying to add 10 to 20 million on top of that revenue.
We were probably at about a seven or 800 person shortfall of people out of a 3300 person.
Set a facility that whereas we were quite a ways behind the ball.
And then as we got through the quarter.
The availability of employees became somewhat better.
And we implemented.
Bonuses and other.
Pay structures that have helped with the retention of the new employees that we hired.
And things improve.
Pretty nicely by the end of the quarter. Unfortunately in the last month as I'm sure you know.
Well weve cases around the world, including El Paso as war as.
Spiked again, so we are unsure as to what's going to happen in the next couple of months or the next quarter.
In terms of.
Availability and cost of employees mainly in Juarez.
Great. Thank you ill step back in Q3 Q.
Once again, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
We'll go back to you Mr. dissolve.
Alright, thank you.
So you did reference new capacity expansion would you. Please please talk about that.
Sure.
We have some new customers that are.
That have products that require different vertical integration technologies that.
No what we currently have in the factory so were investing in those technologies.
In other spots and pinch points.
In our capacity that are requiring purchasers of SMP issue, there or stamping machines there so.
So those are the type investments that we're speaking.
And bill during the quarter, we also.
Did missed another facility down then.
Yeah.
Great. Thank you. Thank you both.
So there has been some speculation about your new hundred million dollar.
Customer.
What additional insights.
Would you share with us about that customer.
I don't think I want to share any insights on that customer.
Yes and.
How about their ramp how is that.
How is that progressing here.
Here in this quarter versus Q4, and and and then in Q2.
The ramp for that customer started in our core Mississippi facility because of the various.
Pieces of timing that had to happen and concerned about.
Well the cases that were happening at the beginning of Q4.
As we've headed down in the past the ramped in.
Mississippi was very successful.
It's been limited only by the availability of components and now we're in the midst of.
Ramping.
The small introductory volumes from Mississippi is too large ongoing volumes in or as Mexico.
So far that ramp is going well.
We haven't had any unexpected.
Technical issues and again the constraint is on some key components.
They're on high worldwide demand.
And given that that that it sounds like those components are not specific to this product and if thats the case.
How do you how do you navigate that to add to meet.
The level of demand that the customer is experiencing.
Well the.
Agreed to which we can navigate that.
Is mainly driven by.
Long lead parts that were buying ahead of demand.
Our customers signing up long term.
Agreements with suppliers of these components.
And continued work in kind of above.
The call of duty.
From our procurement group.
And Brett.
You mentioned the new facility that you leased is there any relationship between this this new customer.
Ramping in Juarez and that new facility.
Yes sure is.
Alright, Thank you and then.
So I guess thats.
I'm going to stay on that for a moment, so that would be an indication to us that you are anticipating that continue to anticipate that customer to be.
To be at a very high revenue run rate.
As the ramp continues.
Yes.
And.
I guess as a side do you have other.
Other prospective customers that.
Could be up and that type of a level that you are looking at or.
Do they all tend to be more in the six to 11 million as you reference for your wins this quarter.
There are a number of.
Very big accounts.
To that I'd say are.
Hi probability of win both that are in the 100 million range.
But.
As my Dear departed father used to say, there's many a slip between covering lip.
So, we'll see where that goes but.
There, it's it's not just a $5 million to $10 million funnel. There are a number of really big.
Possibilities in there.
And.
Or some of those possibilities greater than.
The 100 million size at this customer.
Sure.
Okay.
Well congratulations.
Any comment on timing it when no one knows me.
When those may turn into wins for you.
Yes, it's a it's pretty likely that the answers are pretty short term on those so were hopeful by the end of this quarter, we know what we're doing.
Look forward to hearing more of those are those ones, where you would press release in the middle of the quarter or that we would anticipate to talking about in January if you were successful.
We would like to press releases, but that depends entirely upon our customers' willingness to get your name out there in conjunction with contract manufacturing. So I can't answer what we would do if we won which because it depends on our customers decision.
Right Okay. Thanks.
And then let's jump to the guidance.
For a moment.
The low end of the EPS guidance is down.
From.
What I think a penny down from what you reported this quarter and you hit the low end of the revenue guidance is higher than what you reported this quarter.
Could you talk a.
Through what what looks to be a bit of a of a gap there.
Yes were mainly trying to coach our expenses in case till it gets worse.
There is some increase in costs due to the ramp, but maybe we're trying to couches with half a day and are you seeing at the end due to.
Trying to get employees in.
Whatever happens in Juarez.
So if you are Colgate costs do not increase as a percentage of revenue. As then then we would see.
Earnings growing commensurate with the revenue growth, you're just making the.
Conservative.
Building, if you will that there will be some extra costs testing case.
And we're just trying to be realistic about what what could happen in take a guess and that's that's why the range is getting bigger.
Because the uncertainties are getting bigger we have this is probably the third quarter is my life.
Yes, we've had much more demand than we can build.
So.
Our forecasts are not to be.
Driven by our ability to build there by our customers wishes to buy.
Thats, a new a new place, where I think for a lot of contract manufacturers to be.
And what is the the limitation is it labor.
Primarily or does it tend to be more on the component side or something else I'm not thinking of.
Oh, there's three major spots that are pinch points worse.
First.
Yeah I'd say.
Neither a no order of.
The issue size. So first one is obviously labor.
The second one is parts components and the third is tooling.
So in cases, where customers.
Our suddenly experiencing demand, that's 100 or 200% of their original intended demand.
And they have the tools plastic moulds that we used to make the parts and those plastic molds take anywhere between 12, and 16 weeks to get up and running.
And our customers' customers themselves are.
Tormented by the question of should they doubled their capital investment into new or is covert driven demand going to once again decrease.
Those three things are all limiting our ability to hit what our customers wish we could build.
Well and you just a segway nicely into a question that's been going through my head here, which is.
As.
To what degree.
As this demand.
Temporary.
Versus.
Somewhat more than new normal and then.
Secondarily.
Your guidance on the revenue front is what 125 to 135, if you could meet what your customers.
I want you to produce what would that number what would that number be.
If we could meet everything our customers wanted us to produce it would be around 145 or little bit above that.
Did you say, one four or five.
Yep.
Good thanks.
Wow.
Yeah.
Yep.
So what was the other part of the question I forgot it very yeah.
Transient demand versus more correct.
I forgot it kind of answered that already that's what I was trying to talk about when I said are we covered earlier.
Are we a cold and profit here or are we a covert.
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Suffer as a company I'd say, it's about a net neutral, but that's what I was trying to say before if the upside that we see.
From existing customers at more or less than offset by the downsides, we see from existing customers and.
And the strictly.
Cold weather driven demand.
He is not that the compared to the demand that comes from the rebalancing of supply lane that winds and minimizing risk.
So you have to parse your question even further because there's short term co would demand, which I would classify as a customer.
Revenue was 10000 or something he only thought he'd 5000 them before.
And there is long term.
Well the consequences, which are customers, who are suddenly going Oh, my God I've got my entire supply chain.
Concentrated in one place and as a disaster like Kohl's AD or a trade war comes along I am completely vulnerable.
I need to make a switch.
So it's up to you build to decide how you want to classify that is that a sea change due to the political.
Landscape or is that a sea change its due to covidien will be reversed.
Well, what but that's that's the best I can answer your question.
No. That's fair. Thank you Craig and just so you don't feel left out the tax rate guidance is have been increased to 25% versus your normal guidance at 20% and this last quarter I think I was actually closer to 19%.
Why are you expecting that tax rate to go up.
Yeah, No I think thats predominantly just our expected growth you know, where we're showing the expected growth in revenue this quarter.
That increase profit Unfortunately, the R&D tax credits and offset in our.
Domestic taxes aren't nearly as.
As much as a percentage of total so it's just you know.
As expected.
Profit before tax during the fiscal year.
And Brett if you end up at the low end.
Of the eight of the earnings guidance because your Colgate costs are higher does that imply a lower tax rate, but if you end up with.
With earnings up in the upper that 25% range that at that point, you would have a higher tax rate is that correct or am I not thinking about that to a sliding scale correctly.
Oh, that's correct and you have to be your effective tax rate is based off of what you expect for the full year.
So if we as expected.
Paul covert project one quarter, maybe our.
Significantly change that effective tax rate.
We expect that to the final three quarters of the year.
So okay.
Im trying to gain some insights here.
As to how you all have been thinking about the business. So because you guided the first quarter tax rate at 20%, but now you're increasing that guidance to 25% does that infer is that how you all are looking at the full year as a.
That you will have a higher level of income and this is for the full year now than what you thought you were going to have when you started the first quarter.
Yeah, So there's no.
We are still on I don't know.
We can hear you moderator are you there.
We can hear you.
Oh this is the first.
Hello, Hello, Yes.
Yes, I'm I'm there Craig.
Okay. Okay got you dropped off for a minute there.
Yes, no one can surmise that that you know, we're expecting revenue growth and look I do expect to profits I'm now to be able to pinpoint an exact.
Now for the year I don't think we feel comfortable in stating that we are going to be significantly higher but.
It's all this all estimates.
Management.
Hi, guys good afternoon.
Hi.
Just if you follow up on.
That was wonderful questions [noise] yeah.
The additional cost of 1.4 this quarter, how do you think about that over the long term is that something that you think will be permanent.
Or or.
Or some of it might go away you know in the post Corbett World.
Okay.
You have to increase retention.
Yes, the vast majority of it is labor costs related to wages and hiring.
Costs and training costs.
Okay.
Brad is that fair to say that most of that goes into cost of goods sold so it impacts the gross margin.
Yes that is correct.
Okay.
And then if I look at the PML the product development cost R&D and engineering had to step function increase in the June quarter. I think it went from 1617 too. So the low twos right now is that a reflection of.
The bidding activity and the work that you're doing that waves.
Existing customers and products.
Perspective customers to get new business.
The R&D costs are.
Pretty hard to correlate to the timeframe.
A quarter or two quarters out.
Because.
Many times its funded by our customers, but sometimes it's not.
Sometimes we're doing things on the come because we think if we design something.
That is revolutionary or cool for a prospective customers that will act as a spur.
Spur to get them to change to us.
Other times almost the entire department is involved in design that being funded by current customers.
So I don't think.
Trying to use that as any kind of a barometer for future business side.
Okay that that number that you have right. There now 2.2 does that mean that something that you pay and some of it you would get reimbursed later through.
Product sales.
Or.
Yes, so that is not a net number so for getting reimbursed by our customer.
In engineering contract.
Actually grew up into revenue so that is both internal and external costs.
Got it okay, great and then a follow up on.
Greg you said that they were potentially some very substantial customers and that you might even here before the end of this quarter on some.
Some potential wins.
It seems like these customers have moved through the pipeline relatively fast.
Or is that correct or maybe have you been working on them for for a long time, and you know and didn't tell us about it.
[laughter].
Oh, yes.
Greg Let me think yes.
With every question you guys ask us the answer is both so one of them we've been working on for over a year one of them.
Came knocking at our door about a month ago, yes.
Okay.
Further widen the one that came knocking on your door month ago.
It could it could happen that fast it could happen in just a few months.
The award.
It could happen in just a few months ex the actual ramp will take quite some time, but the award could happen in just a few months.
Okay great.
Okay, great. Thanks, a lot guys.
You bet research.
At this time there are no further questions I'll hand, the conference back to our speakers for any additional or closing remarks.
Okay, well once again, thank you everyone for participating in today's call.
I wish all of you and your families.
Safe and healthy next three.
Forward to talking to you again next quarter.
That does conclude today's conference. Thank you all for your participation today you may now disconnect.
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