Q2 2021 Key Tronic Corp Earnings Call
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Good day and welcome to the Q2 fiscal 2021 Key Tronic Corporation Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Brett Larsen. Please go ahead.
Thank you.
Good afternoon, everyone I am Brett Larsen Chief Financial Officer of key Tronic.
I would like to thank everyone for joining us today for our Investor Conference call.
Joining me here in our Spokane Valley headquarters is Craig Gates.
President and Chief Executive Officer.
As always I would like to remind you that during the course during the course of this call.
Make projections or other forward looking statements.
The future events or the company's future financial performance.
Please remember that such statements are only predictions actual events or results may differ materially from more information you May review of the risk factors outlined on the documents of the the company has filed with the SEC specifically.
Specifically, our latest 10-K quarterly 10 Qs.
Keith.
Please note on this call, we will discuss historical financial and other statistical information regarding our business in the operations.
Some of this information is included in today's press release.
Recorded version of this call will be available on our website.
Today, we released our results for the quarter ended December 26, 2020 for the second quarter of the fiscal year 2021, we reported total revenue of $128 3 million.
10% from the 116 $7 million in the same period of fiscal year 2020.
For the first six months the fiscal year 2021 total revenue is 251 $5 billion up 13% from $222 million in the same period of fiscal year 2020 the.
The revenue increase during the second quarter of fiscal year 2021 was due to the successful ramp of several new customer programs and increased demand from existing customers.
At the same time, our revenue continued to be constrained by temporary government imposed shutdowns of labor shortages at our facilities in war is due to the COVID-19 pandemic and associated public health measures.
During the second quarter of fiscal year 2021, Michigan incurred additional caused by COVID-19, the COVID-19 crisis totaling approximately $1 $8 million or roughly <unk> 13 per share.
Despite the pandemic the adverse impact on revenues and expenses on <unk>.
Margin margins improved in the second quarter of fiscal year 2021, due to increased revenue.
The gross margin was eight 3% and hardware the margin was two 1% up from gross margin of only 7% and an operating margin of one 3% in the same period of fiscal 2020.
For the second quarter of fiscal year 2021, net income was $1 6 million.
The <unk> 14 per share up from $800000 or <unk> <unk> per share for the same period of fiscal year 2020.
For the first six months the fiscal year 2021, net income was $3 3 million with <unk> 30 per share.
Up from $2 4 million.
22, <unk> per share for the same period of fiscal year 2020.
Turning to the balance sheet, we continue to maintain a strong financial position.
As a result of the pandemic related production delays of the second quarter of fiscal year 2021, and the continued ramp and transfers of new programs.
Inventory turns remained flat with the prior quarter.
In future quarters, we expect to see our net inventory turns increase to be more in line with the expected revenue.
At the end of the second quarter trade receivables were up $8 $5 million from the prior quarter.
Selecting the increased revenue levels and the timing of shipments later in the quarter.
Our DSO the increase to about 69 days, which reflects the timing of shipments during the quarter and some some typical delay in payments from customers at the.
Calendar year end.
Overall, we have a healthy balance sheet with total working capital of $174 million.
And the current ratio of two nine to one net.
Nevertheless, we feel it is prudent to preserve cash and expand liquidity where possible.
In this light we added additional credit facility from a bank in Mexico.
To bring our total credit facility up to $105 million to manage pandemic risk and give us more flexibility to ramp up production in the coming months.
Total capital expenditures for the first six months of fiscal 2021.
Approximately $7 million and we have increased our expected capex.
To the roughly about $12 million for the full fiscal year.
While we are keeping the careful eye on expenditures during the fiscal year 2021, we plan to continue to invest in our production equipment.
The key equipment and plastic molding capabilities as well of efficiency.
The efficiency improvements in our facilities as we prepare for growth and add capacity.
So the FERC for the third quarter fiscal year 2021, we currently expect to report revenue of approximately of 130 million to $140 million and earnings of approximately 20 to 25 per diluted share.
That said there is a lot of uncertainty surrounding these per and estimates we're working closely with our customers key suppliers and employees.
Minimize the the effects of delays attributable to the continued global pandemic increased global freight and logistic demand and the signs of certain commodity constraints that have increased lead times and limited availability of key components.
While our facilities in the U S Mexico, China and Vietnam are currently operating and rigorously following current health guidelines on.
Certainty as to the possibility of future temporary closures.
Customer fluctuation in demand and cost and future supply chain disruptions during the rapidly changing COVID-19 environment could significantly impact operations in the coming periods.
Due to the heightened risks associated with the pandemic. We may also issue updated guidance during the coming quarter.
In summary, while the COVID-19 crisis continues to cause disruptions during the second quarter and remains the risk in future periods.
We're encouraged by our continued growth as we move into the third quarter of fiscal 2021 and.
And by our prospects for future growth.
The overall financial health of the company is strong and we believe that we are increasingly well positioned to win new EMS programs and continue to profitably expand our business over the longer term that's it from me Craig.
Thanks, Brett.
Despite the headwinds presented by the pandemic, we're very pleased with the strong positive momentum in the second quarter.
As we discussed in detail on previous calls the pressures on our customer base to lessen the supply.
China concentration remain very powerful.
To date these tailwind of driven a significant increase of our business and net increase of game of along multiple vectors.
Firstly current customers with programs in the Asia outsourced to other providers of awarded some of that business to US we are in the midst of rapid yet.
Secondly, current customers with new programs that were in the process of being awarded.
Eliminating Asia from their selection process and selected key tronic based on our North American footprint.
We are in the midst of ramping those programs also.
Thirdly, new customers with both existing and new programs of also selected key tronic based upon our footprint and experience.
We would not have won several of these new programs without the opportunity. The first ramp of programs in our USA plants and subsequently transfer them to our lower cost plants in Mexico.
Another factor in many of our recent wins has been the realization of many tests I mean the companies.
Companies in our target market that day.
Of lost design control of their products in the process of outsourcing them key.
Key tronic strength of an engineering has proven to be of powerful asset as these companies work to regain design control.
And so all of the new project wins are due in part of our design services.
And then the other factor in many of our recent wins has been unusually high level of vertical integration.
The customer seeks to recreate and existing supply chain the risk of an effort is multiplied by the number of new suppliers it must be identified.
Qualified bid selected ramped and managed.
We believe key tronic is unique among our tier two competitors in that we offer a one stop shop from Rowley metals printed circuit boards of Assembly test and distribution.
Additionally, many of our customers' products require a manufacturing process that is unique to their product key tronic has a long history of developing and optimizing such processes as we up onboard and the customer.
On this development is aided by of vertical integration.
And certainly surrounds the continuing impact of the pandemic and the new U S administration stance towards China.
Nevertheless, we believe that the lessons learned.
Through the China U S tariffs and the pandemic will continue to drive our current and prospective customers actions.
We believe they will continue to weigh carefully the degree to which the concentrate their supply chain on any one region and seed the design controls of the outsource partner.
The more fully recognize the significant impacts the elongated supply chain can have on both cost and availability.
The risks of IP appropriations and the attractiveness of doing business with outsource partner you can minimize the risk on all of these factors.
We structured the key trial can you. The obviously the answer as the market began to understand you calculate the costs and risks of over concentrated outsourcing.
We're experiencing increased positive effects of our structure before the advent of tariffs on pandemic.
When both of these unprecedented situations came along they serve the accelerate the positive results of our strategy.
Even if both of these challenges gradually disappear, we expect that our market will still have the fundamentally and permanently tilted not flavor.
We are at an unprecedented point in key tronic history.
We see demand of over $150 million per quarter.
A foreseeable forecast the window.
Our results from the last two quarters of been dampened by Covid effects on our workforce part availability and the industry wide shipping and logistics issues.
These constraints will continue to be the case, but the growing demand from new and existing customers to the far better problems, the half and not enough customer demand.
At the same time, we remain focused on protecting the health of all of our employees by adhering to the current health guidelines as well as increasing retention of available employees.
As Brent noted we are incurring increased expenses related to the pandemic in order to attract and retain employees, we need to meet our growing demand.
As well as preventative measures of equipment for employees at all of our facilities in U S, Mexico, China and Vietnam.
While our supply chain remains vulnerable to the temporary disruptions caused by a flare up of the virus and associated of Lockdowns in the regulations.
And so far, but mainly able toward growth temporary disruptions of closures.
We've also managed transportation complexities and disruptions to our supply chain.
The alternative sourcing airfreight product Redesigns and alternative.
On the qualifications.
We're closely monitoring inventories and will continue to use safety stock as much as possible to ensure minimum interruptions to our customers.
Nevertheless, while we've been able to find solutions for most of the COVID-19 related challenges to date.
Clearly none of us are out of the woods with respect to the global pandemic.
In closing I want to once again, thank our great employees for the dedication during these challenging times.
And for adhering to our strict guidelines for social distancing masks and other of recommended precautions during the pandemic.
Because of the courage hard work and strategic foresight, we expect continued revenue and earnings growth in the third quarter.
And we continue to invest in new capacity to prepare for long term growth.
Let me assure you that we will continue the way protecting the health of our employees our highest priority.
I want to wish you and your families good health and safe passage during the pandemic.
This concludes the formal portion of the presentation, Brent and I will now be pleased to answer your questions.
Well thank you.
If you would like the signal with questions. Please press star.
One on your Touchtone telephone.
If you are joining us today, you think speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again.
One if you would like to ask questions.
Star.
One.
And our first question will come from the Bill <unk> with Titan capital.
Alright. Thank you kind of thank you first of all congratulations on what I think of a record quarter in terms of revenue I don't believe you called that out but.
I mistaken.
But that's not the case.
Thank you.
Congratulations.
So let's start with my normal first question. Please.
What is the size of each of the new programs that you won in the quarter.
Well those of our team.
Two 8 billion of peace.
Okay.
And the.
Is it correct that there were three of them or did you have multiple wins and are any of those categories.
The thing.
Okay. Thank you.
Yeah.
Let me start by asking about the comment that you just made towards the end of your comments at the grab.
That you said you have 150 million or have line of sight on 150 million of demand per quarter for the foreseeable future.
Can you talk about kind of.
The the gap I guess, if you will between I'm going around $130 million, where you're at today and the 150 million and what you see.
As your ability or or lack thereof to be able to march towards that 150 million the demand level.
Share of the gap is.
Strictly completely caused by the pandemic. So we have problems as I said in the comments.
Moving parts.
I don't know if you're aware of that.
Our container of the eastern cost $3000.
<unk> used the ship your parks across the ocean to now.
From 10000 to $12000.
When you can get it.
There are.
Multiple ships anchored offshore at the <unk>.
Ports trying to get space to get unloaded because the.
Teamsters are suffering.
Debbie just like the rest of the us.
So we got on logistics issue.
We have.
Changing risks and on.
The availability of employees.
In order to.
Products built and shipped.
So those two items on what stands between the.
On demand.
And what we actually project that we can build.
We are we continue to drive.
Put ourselves in a position of the hit that number.
That's that's causing the inventory to be slightly above of what we would like it to be.
But.
Yeah.
<unk> forecast that we are making the official forecast is based upon our year to day.
Of what's happening in the parts availability.
Mistakes and workforce.
Portions of our operations.
Thanks, Greg and if if we.
If we look at the the.
150 million.
If the pandemic or to write an instantaneous sort of disappear.
And you were COVID-19 alleviate the shipping of the labor problems.
Would there be a demand side of the equation that would also pull back.
And therefore, you wouldn't have that number to hit.
Or.
Or do you see enough demand.
Without the pandemic.
You're right.
You wouldn't be able to move that direction.
That's a tough one to answer.
I would say that.
Maybe a little of it would go away.
Quite a bit of it looking forward is based upon new customer ramps.
Alright, thank you.
The.
Before we go to new customers a couple of the existing well at least one of existing customer question.
I think yeah and breadth of opening remarks, there was the comment here at <unk>.
The increased demand from existing customers.
Out there.
Would you talk about that are increasing demand for reported that segment of your customer base and then secondarily you raised the capex guidance by about three 5 million of.
Talk to talk to that point, and where that money is going places.
We have been winning new programs from existing customers.
We see a trend where our business with them was shared with.
One or two or three other suppliers.
And as our customers have been exiting or suppliers.
Redistribution of their supply chain, we've been the beneficiary of loans decisions.
All of that means that we are going to need.
All of our equipment in order to build an increased volume.
So.
There is that aspect of it and then the ramp of the customer programs that were just beginning to enjoying revenue.
From those programs is also required that we bring on more.
Half of equivalent.
We are in fact right now outsourcing.
That is significant.
Callers barely.
Fairly significant portion of our production.
Parts of it anyway, because we're concerned about.
The COVID-19 situation.
Asking the question.
Don't want to have put too much capital in share.
On a couple of customers declined.
The difficult whenever it goes away it fully.
So we're trying to hedge our bets.
Not gone by.
The equipment.
Completely bring all of this business completely in house.
But human we're doing that we are going to have to spend of over or capital on some of SMT lines and other things.
Okay, great. Thank you very much and then.
Lastly for now.
On the last call you had mentioned a 100 million dollar prospect piece.
Piece of new business the floating around out there would you would you talk the talk to that point and bring us up the speed and an update on the on what Youre seeing on that front.
It is still floating around out there and we.
We remain hopeful.
What's the next.
Important either decision point of milepost workout situations.
All of it has to go from a verbal handshake award to contract.
So you you already have a oh verbal.
On a verbal.
Award.
Yes.
Well, congratulations I I'll step back in queue, and let someone else ask questions.
Once again, if you would like the signal with questions. Please press star one.
One on your Touchtone telephone.
Star.
One if you would like to ask questions.
And our next question will come from George Melas with MK H management.
Good afternoon, Greg Greg Hokey day.
Guys have rallied.
I have a follow up on Ben's question. This is.
This is the objective.
With her.
And if one were to.
At the back of the Covid related cost to operating income.
This is your best operating margin since.
2013.
So you're clearly doing something right and you are you gave me some schemes you on.
Sort of improving your gross margin. So maybe can you talk a little bit about the profitability of the business.
And what has improved the profitability in the last couple of years and would you see that going.
Okay.
Okay.
Number one as we get the farther away from breakeven.
Our.
Profits.
The non linear fashion.
Hum.
The always been in the position, where if we wanted to we could.
Cut overhead and.
Tried to go for and maximized profit rather than the balance between profit and growth.
Always chosen the balance.
But as we get farther away from breakeven.
We see a continued improvement in profit because of the fixed costs become the norm.
Linear.
And we don't see having the AD.
A lot more fixed costs in the.
Labor and management side of the equation.
Except in the steps as we go up.
So theres been a lot of work done on them.
The efficiencies in the factories.
We're very proud of the.
The key.
Cost of it we've been achieving in.
Of the productivity that we've been achieving in.
All of the factories.
We are through the <unk>.
Purchase of purchase, but the whole setup and startup of the Vietnam.
They were through the.
The downsizing of our China Shanghai facility.
We are through a number of expensive ramps.
So a streamlining of our domestic temporary shifts domestic operations said in.
Changed quite a bit so there's a lot of.
A lot of really good slides that I'm pretty proud of the talk about cost per hour.
The cost per unit, the on time delivery and the.
Throughput yield and everything else, we measure in two of lot of work by our staff by all of our employees.
Most of those graphs are heading in the right direction, but the overall driver is in this business revenues just key new business.
Although of course, you're a bit more than likely to get it in the building.
As a non linear impact.
On profit.
Okay great.
Thank you that's very helpful.
And.
I think you had I think if I remember, Greg you kind of.
The new 100 million net prospects floating around.
And remind me if that's correct and what are the characteristics of the two prospects.
Well, if we're going to stick with the analogy one of 'em sake.
Okay.
Okay.
The other one is floating and it's coming up on playing nicely.
Okay.
And what would be more characteristic of this of this.
Of this new customer.
Customer of a program that we did one that requires the sign on your part is it's one that is very complicated.
Maybe can you characterize the price.
Sure.
It did require a desire on our part of that played a major role on our way.
The handshake agreement.
It's.
Another example of the products that you would look at in say the not many people have experience in doing this.
Why is it the key tronic thinks they can do this.
So it's not necessarily complicated, but it is in a different market than we've been before.
And that kind of slots of into our most successful customer relationships as I said in my comments.
Where we run into a customer who has the unique.
Product not necessarily the product that you would look at and then my God, that's really strange, but the product that.
It's not really that easily outsource because it has some.
Really unusual process.
In the wheelhouse of normal contract manufacturers, who grew up as the board Stuffers.
We really shine on those so this is the example, this is actually on.
On top of the one we won previously which also required.
Our design expertise.
Are adopting learning.
And capitalizing a new and one of the process to us.
This is the exact twin of that in terms of growth characteristics.
That's great that's very encouraging because thats, where you guys shine.
And the combination of design expertise and complex processes.
Okay.
Great and nothing else really good thank you very much.
Thanks George.
And our next question will come from Bill does the one with Titan capital.
So I do want to circle back to that $100 million prospect what the.
What will it take the move from the handshake, where you're at now too to an actual contract.
Well, that's always the beautiful mystery to understand.
Yes.
Every day, we can and have to do.
Now we are waiting for our customer to finalize the couple of their supply agreements and I am told that I believe that that's all of its required.
And nothing else once day once they make it through the supply agreements that you all want me to do other than then get out your pad on signing the contract.
Well sure of that sounds easy, but yeah. Okay.
The essentially that's the short version.
That's a really really really short version, but yeah. Okay.
I'll get the pennant handed to you if that's helpful.
Okay.
Let me actually shift to the other part of the of the.
The press release that we Havent discussed the Atwood shares on.
Thanks Covid.
It referenced in the net release government and per shut downs.
I'm familiar with those with restaurants, but that doesn't that doesn't seem to apply to you all and I don't have a lot of familiarity with Mexico.
Would you would you talk us through what what you experienced in terms of shutdowns of them and how much of the of the.
The narrowing of the eight.
Came from from whatever shutdowns you dealt with.
Sure.
So.
We have about 5000 employees and whereas right now.
<unk>.
The last quarter was the last quarter of two Dan last quarter on the weekends.
So last quarter, we had the sorry the quarter, we're talking about here, we had two weekends that we were forced the shutdown.
Those are pretty critical the weekends to us because we had planned on installing a number of pieces of capital equipment.
And we weren't able to do that.
So as a result, we had to run through the last week of the.
The December quarter, which is really really hard in Mexico.
People really like the observed the Christmas holiday so.
Overtime and bonuses.
All different kinds of costs.
Of that pretty quickly.
So that's.
That's what happened in this last quarter previous to that I don't know if you remember we had a warehouse facility shut down for almost two and a half three weeks.
Yeah.
So as those of the kinds of things that can happen.
The good news is that the infection rate.
Hospitalization rate and death rate in Juarez is falling dramatically.
So.
We were hopeful thats been the continue.
They've adopted a very intelligent approach.
Public safety that I'm, not going to get into because of our salt Lake on for each and on top of the soap box.
Well the doing all of the wall in terms of controlling the pandemic spread.
We're really proud of the fact that.
We've had almost zero transmissions within all of our facilities and when you're talking about 5000 people.
A lot of work to make that happen right. So really proud of our team on what they've done in Juarez.
That's what we're talking about all the talk about government imposed closures.
All of our facilities.
Alright, that's helpful on and the next question all of Us to apologize in advance for my ignorance of.
On the surface. If you were shut down for nearly three weeks.
In our in the prior quarter.
And this quarter you were.
Sure you were all of my shut down for two weekends. It seems like the cost impact would have been the less but you called it out as $1 4 million in the prior quarter and $1 8 million in this quarter.
Or would you would.
Would you reconcile those two for us.
Yes, absolutely the bill so during those three weeks.
We were not required to pay all of the labor.
Overhead during those three weeks.
Michelle.
Included in this quarter.
On a number of employees.
Due to preexisting conditions are excluded from coming to work.
Those are we are.
Pain to stay at home.
In addition to what Craig mentioned is the.
If you are open during the Christmas week, whereas youre going to have to pay.
The Delta.
If not two five times to get people to show up.
And you're also going to.
The likely has a bunch of yield issues and the inefficiencies.
So those all combined in the having a little more of an impact in our second quarter than on the first quarter.
That's helpful. Thank you very much so let me take a.
Take something else that was set on trying to understand it better that you had equipment. The rent you were going to install on those weekends that are on that.
Weren't allowed to be open.
Presumably you were putting that equipment in four of business that you had a good day.
That delay the ramp of.
Uh huh.
Business with that equipment, whereas going towards them and if so when do we.
What's the timeline now four of.
Per moving forward.
It did indeed ROI of the ramp.
That's why we're projecting a higher quarter of this quarter over the last quarter.
Understood. Thank.
Thank you both.
Okay.
And our next question will come from Scott on D with Moors <unk> Cabot.
Kind of in just one question. If I may have you had to add additional square footage in your Mexican facilities to accommodate.
Some of this new business the cube coming your way.
Yes.
Can you give us an idea of how much square footage you've had to add.
I think it's a bad.
Out of 100000 square feet. So we are currently in a five year lease of that facility. We've done some kind of improvements which are included in capex.
But that is what we have invested in today.
And I made that I I apologize what is that as a percentage of what is currently available in Mexico.
That's about a 10% increase.
Not insignificant.
Thanks, guys appreciate your time.
Thank you.
Thank you and that does conclude the question and answer session. I will now turn the conference back over to you for any additional or closing remarks.
Okay. Thank you all again for participating in today's conference call.
All of you on the families stay healthy and safe.
I look forward to speaking with you again next quarter.
Thank you and that does conclude today's conference call. We do thank you for your participation and have an excellent day.
Okay.