Q2 2022 Key Tronic Corp Earnings Call
Speaker 1: Please stand by.
Please standby.
Good day and welcome to the Q2 fiscal 2022 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 Sir.
Speaker 1: Good day and welcome to the Q2 fiscal 2022 Key Toronto Corporation Conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brett Larson. Please go.
Thank you.
Speaker 2: Good afternoon, everyone. I am Brett Larson, Chief Financial Officer of Keytronic. I would like to thank everyone for joining us today for our investor conference.
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.
Speaker 2: Joining me here in our Spokane Valley headquarters is Craig Gates, our president and chief executive officer.
Joining me here in our Spokane Valley headquarters is Craig Gates, our President and Chief Executive Officer.
Speaker 2: 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 or the company's future financial performance.
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 or 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 review the risk factors outlined in the documents. The company has filed with the SEC specifically the latest 10-K quarterly 10, Qs and eight case.
Speaker 2: Please remember that such statements are only predictions. Actual events or results may differ materially. For more information, you may review the risk factors outlined in the documents the company has filed with the SEC, specifically the latest 10K, quarterly 10Qs and 8K.
Please note that 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 a recorded version of this call will be available on our website.
Speaker 2: Please note that on this call we will discuss historical financial and other statistical information regarding our business and operations.
Speaker 2: Some of this information is included in today's press release and a recorded version of this call will be available on our website.
Today, we released the results for our quarter ended January one 2022 for the second quarter of fiscal 2022, we reported total revenue of $134 $5 million compared to $128 3 million in the same period of fiscal year 2021.
Speaker 2: Today we released the results for our quarter-ended January 1st, 2022. For the second quarter of fiscal 2022, we reported total revenue of $134.5 million compared to a 128.3 million in the same period of fiscal year 2021.
Revenue for the second quarter of fiscal year 2022 related to customer reimbursements for tooling equipment and other expenses increased approximately $10 million when compared to the previous year.
Speaker 2: Revenue for the second quarter of fiscal year 2022 related to customer reimbursements for tooling equipment and other expenses increased approximately $10 million when compared to the previous year.
Speaker 2: For the first six months of fiscal 2022, total revenue was $267.2 million compared to $251.5 million in the same period of fiscal 2021.
For the first six months of fiscal 2022, total revenue was $267.2 million compared to $251.5 million in the same period of fiscal 2021.
Speaker 2: During the second quarter of fiscal year 2022, the global supply chain, pandemic, and transportation issues continued to disrupt production, including intermittent parts supply, factory downtime, and overtime expenses.
During the second quarter of fiscal year 2022, the global supply chain pandemic and transportation issues continued to disrupt production.
Including intermittent parts supply factory downtime and overtime expenses in.
Speaker 2: In addition, we had a seasonal closure for two weeks at the end of December in our Mexico facilities that limited production time available for the quarter.
In addition, we had a seasonal seasonal closure for two weeks at the end of December in our Mexico facilities that limited production time available for the quarter.
Speaker 2: Legal costs related specifically to the SEC's review of last year's whistleblower complaint totaled approximately $0.7 million during the quarter.
Legal costs related specifically to the SEC's review of last year's whistleblower complaint totaled approximately zero point $7 million during the quarter.
Speaker 2: For the second quarter of 2022, our gross margin was 7.3%, and operating margin was 1.2%. Compared to a gross margin of 8.3%, and an operating margin of 2.1% in the same period of fiscal 2021.
For the second quarter of 2022, our gross margin was seven 3% and operating margin was one 2% compared to a gross margin of eight 3% and an operating margin of 2.1% in the same period of fiscal 2021 .
Speaker 2: Note that revenue attributed to customer reimbursements during the second quarter of fiscal year 2022 did not contribute much to our gross margin.
Note that revenue attributed to customer reimbursements during the second quarter of fiscal year 2022 did not contribute much to our gross margin.
For the second quarter of fiscal year 2022, net income was zero point $6 million or five cents per share compared to $1.6 million or 14 cents per share for the same period of fiscal year 2021 for.
Speaker 2: For the second quarter of fiscal year 2022, net income was $0.6 million, or $0.05 per share, compared to $1.6 million, or $0.14 per share, for the same period of fiscal year 2021.
Speaker 2: For the first six months of fiscal year 2022, net income was $1.4 million or $13 per share compared to $3.3 million or $0.30 per share for the same period of fiscal year 2021.
For the first six months of fiscal year 2022, net income was $1.4 million or 13 cents per share compared to $3.3 million or 30 cents per share for the same period for the same period.
For fiscal year 2020.
Speaker 2: Turning to the balance sheet, we continue to maintain a strong financial position.
Turning to the balance sheet, we continue to maintain a strong financial position.
Speaker 2: As a result of supply chain related production delays in the second quarter of fiscal 2022, and the continued ramp and transfer of new programs, our inventory turns decrease from the prior quarter.
As a result of supply chain related production delays in the second quarter of fiscal 2022.
And the continued ramp and transfer of new programs, our inventory turns decreased from the prior quarter.
Speaker 2: We are carefully balancing customer demand and the likelihood of successfully bringing in parts in time for planned production.
We are carefully balancing customer to customer demand and the likelihood of successfully bringing in parts in time for planned production.
The production planning now requires that we look out much further in the future than in historical periods.
Speaker 2: The production planning now requires that we look out much further in the future than in historical periods.
Speaker 2: In future quarters, we expect to see our net inventory turns to be more in line with expected revenue as efforts to mitigate the impact of supply chain issues, begin to yield improvements and new production programs begin to ramp.
In future quarters, we expect to see our net inventory turns to be more in line with expected revenue.
His efforts to mitigate the impact of supply chain issues began to yield improvements and new production programs begin to ramp.
Speaker 2: At the end of the second quarter, trade receivables were down about $3 million from the prior quarter, reflecting the timing of shipments and improved collections. Our DSOs remained in about 83 days, same as in the first quarter, which reflects both timing of shipments during the quarter and some delays in payments from customers who were also impacted by the pandemic-related slowdowns and restarts in their respective markets.
At the end of the second quarter trade receivables were down about $3 million from the prior quarter, reflecting the timing of shipments and improved collections. Our dsos remained at about 83 days same as in the first quarter, which reflects both timing of shipments during the quarter and some delays in pay.
<unk> from customers, who were also impacted by the pandemic related slowdowns and restarts in their respective markets.
Overall, our balance sheet has total working capital of $176 $4 million and a current ratio of two to one.
Speaker 2: Overall, our balance sheet has total working capital of $176.4 million and a current ratio of 2 to 1. This is down from the prior quarter, largely due to growing customer production requirements and onboarding new programmers.
This is down from the prior quarter, largely due to growing customer production requirements and Onboarding new programs.
Speaker 2: Total capital expenditures were about $1 million for the second quarter of fiscal 2022. We're keeping a careful eye on expenditures during fiscal 2022 and expect our capital expenditures for the full year will be around $6 million.
Total capital expenditures were about $1 million for the second quarter of fiscal 2022.
We're keeping a careful eye on expenditures during fiscal 2022, and expect our capital expenditures for the full year will be around $6 million.
Speaker 2: We plan to continue to invest selectively in our production equipment, SMT equipment, and plastic molding capabilities, as well as make efficiency improvements in our facilities to prepare for growth and add capacity.
We plan to continue to invest selectively in our production equipment, SMT equipment, and plastic molding capabilities as well as make efficiency improvements in our facilities to prepare for growth in <unk>.
Add capacity.
Despite cut despite growing custom customer demand and new program launches, we expect the delays in the supply of key components will continue to limit production and adversely impact operating efficiencies for the FERC for the third quarter of fiscal 2022, we expect to report revenue.
Speaker 2: Despite growing customer demand and new program launches, we expect that delays in the supply of key components will continue to limit production and adversely impact operating efficiency.
Speaker 2: For the third quarter of fiscal 2022, we expect to report revenue of approximately $130 million to $140 million.
<unk> of approximately $130 million to $140 million.
Speaker 2: and earnings are approximately 5 to 10 cents per diluted share.
And earnings of approximately five to 10 cents per diluted share.
We're working closely with our customers key suppliers and employees to minimize the effects of delays attributable to the continued global pandemic increase increased global freight and logistics costs and limited availability of key components.
Speaker 2: We're working closely with our customers, key suppliers, and employees to minimize the effects of delays attributable to the continued global pandemic, increased global freight and logistics costs, and limited availability of key components.
Speaker 2: While our facilities in the U.S., Mexico, China, and Vietnam are currently operating while following current health guidelines, uncertainty as to the possibility of future temporary closures, customer fluctuations in demands and costs, future supply chain disruptions during the rapidly changing COVID-19 environment, and other potential factors could significantly impact operations in coming period.
While our facilities in the U S Mexico, China and Vietnam are currently operating while following current health guidelines uncertainty as to the possibility of future temporary closures customer fluctuations in demands and costs future supply chain disruptions during the rapidly changing COVID-19 environment.
Ironman and other potential factors could significantly impact operations in coming periods.
Speaker 2: In summary, we continue to see increased demand and new customer wins improve our total backlog.
In summary, we continue to see increased demand and new customer wins improve our total backlog.
However supply of G supply chain disruptions and the pandemic continue to impact our business during the second quarter and remain risks in future periods.
Speaker 2: However, we are encouraged by our growing backlog and by our prospects for future growth. New sales prospects and recently won programs continue to increase our customer to demand to unprecedented levels for ketronic.
However, we are encouraged by our growing backlog and by our prospects for future growth new sales prospects and recent recently won programs continue to increase our customer demand to unprecedented levels for key tronic.
Speaker 2: The overall financial health of the company appears strong, and we believe that we are increasingly well positioned to continue to win new EMS programs and to continue to profitably expand our business over the longer term. That's it for me, Craig. OK.
The overall financial health of the company appears strong and we believe that we are increasingly well positioned to continue to win new in EMS programs and to continue to profitably expand our business over the longer term.
That's it for me Craig.
Thanks, Brett while we continue to face stiff headwinds from worldwide supply chain challenges in the pandemic.
Speaker 2: While we continue to face the stiff headwinds from worldwide supply chain challenges in the pandemic.
Speaker 2: We're pleased with a successful ramp of new programs and are expanding customer base in the second quarter of fiscal 2022.
We're pleased with the successful ramp of new programs and our expanding customer base in the second quarter of fiscal 2022 .
Speaker 2: During the second quarter, the industry continues to face persistent worldwide shortages in the supply of key components, particularly for electronic parts.
During the second quarter.
The industry continues to face persistent worldwide storage shortages in the supply of key components, particularly for electronic parts.
Speaker 2: These shortages have extended production timing and caused transportation costs to triple. Had it not been for the supply chain issues, we believe burgeoning customer demand would have driven revenue for the second quarter in excess of $160 million. Unfortunately, we do not expect the supply chain disruptions to improve significantly in the near term. We also struggled with increasing labor costs and shortages of production staff at some of our sites as a part of the industry-wide labor.
Shortages have extended production timing and cause transportation cost of Triple had it not been for the supply chain issues. We believe burgeoning customer demand would have driven revenue for the second quarter in excess of $160 million. Unfortunately, we.
We do not expect the supply chain disruptions to improve significantly in the near term.
We also struggled with increasing labor costs and shortages of production staff some of our sites as a part of the industry wide labor shortages.
Speaker 2: In the face of all these challenges, we continued winning new customers and wrapping new programs.
In the face of all these challenges, we continued winning new customers and ramping new programs.
Speaker 3: During the second quarter, we won new programs involving industrial robots, blighting control, disinfection, food production, and energy management systems.
During the second quarter, we won new programs involving industrial robots, why Didnt control disinfection.
Food production and energy management systems.
We also announced a significant new program win with one of the world's leading power equipment companies or.
Speaker 3: We also announced a significant new program win with one of the world's leading power equipment companies.
Speaker 3: or what you expect to begin manufacturing in the first quarter of fiscal year 2023 and once fully ramped.
Which we expect to begin manufacturing in the first quarter of fiscal year 2023, and once fully ramped.
Speaker 3: could contribute approximately $80 million in annual revenue.
Could contribute approximately $80 million in annual revenue.
Speaker 3: We were selected in large part because of our design and manufacturing expertise to help them accelerate introduction of new products as well as to enhance their ability to increase product availability to fulfill the demand.
We were selected in large part because of our design and manufacturing expertise to help them accelerate introduction of new products as well as to enhance their ability to increase product availability to fulfill demand.
This new relationship represents an important expansion of our customer base.
Speaker 3: This new relationship represents an important expansion of our customer base.
We would not have won as many new programs without our design capabilities and our multi region footprint, which is designed to be the ideal solution to our customer supply chain issues.
Speaker 3: We would not have won this many new programs without our design capabilities and our multi-region footprint, which is designed to be the ideal solution to our customer supply chain issues.
During the second quarter of fiscal 2022 we saw a significant increase in production across our U S based facilities in fact.
Speaker 3: During the second quarter of fiscal 2022, we saw a significant increase in production across our UBS based facilities. In fact,
Speaker 3: Over the last three quarters, our Midwestern facilities have won business, which we expect will result in an increase of over 35% in annual revenue generated by those facilities by this time next year.
Over the last three quarters, our Midwestern facilities at one business, which we expect will result in an increase of over 35% and annual revenue generated by those facilities by this time next year.
Moreover, production at our new Vietnam facility continues to grow and we expect big things from our <unk> facility in the future.
Speaker 3: Moreover, production at our new Vietnam facility continues to grow and we expect big things from our Da Nang facility in the future.
As we've discussed on previous calls the pressures on our customer base to lessen their Asian supply concentration remained very powerful.
Speaker 3: As we discussed on previous calls, the pressure is on our customer base to lessen their Asian supply concentration and remain very powerful.
Speaker 3: Demand for North American production continues to grow with no foreseeable end of tariffs intensifying political tensions between China and US, increasing Asian production costs in time to market and a weakening US dollar. These factors have driven a significant increase in our business.
Demand for North American production continues to grow with no foreseeable end of tariffs intensifying political tensions between China and U S.
Increasing Asian production costs, and time to market and a weakening U S dollar.
These factors have driven a significant increase in our business.
He tried to CASM emerged as the ideal answer to over cason duration of Asian supply and for onshore into North America, particularly for those companies with programs in the range of 5 billion to $100 million.
Speaker 3: Heatronic has emerged as the ideal answer to overconcentration of Asian supply and for on-showing to North America, particularly for those companies with programs in the range of $5 million to $100 million.
Speaker 3: We provide everything needed to make supply chain diversification easy, less risky, and less costly.
We provide everything needed to make supply chain data diversification easy less risky and less costly.
Speaker 3: Our solution set provides companies with both local sources for low volume products and low cost sources close to the geographic markets for higher volume products. We also attract the companies that have been overly concentrated with an Asian source.
Our solution set provides companies with both local sources for low value products and low cost sources close to the geographic markets for higher volume products. We also attract that companies that have been overly concentrated with an Asian source it.
Speaker 3: and hence are more likely to have lost engineering control.
It hits are more likely to have lost engineering control.
Speaker 3: We can facilitate the move of production from a competitor to our site, enabling the smooth transfer by providing design and production engineering services to those companies who no longer have that capability.
We can facilitate the move of production from a competitor to our site, enabling the smooth transfer by providing design and production engineering services to those companies, who no longer have that capability.
Our vertical integration can lessen the risk time and cost involved at a transfer.
Speaker 3: Our vertical integration can lessen the risk, time, and cost involved in a transfer.
Speaker 3: Moreover, after a decade of developing custom processes for a staggering array of products, we can onboard just about any product imaginable.
Moreover, after a decade of developing custom processes for a staggering array of products. We can onboard just about any product imaginable.
Moving into the third quarter of fiscal 2022 significant uncertainty still surrounds that continuing disruptions to global supply chains for key components and the threat of the pandemic.
Speaker 3: Moving into the third quarter of fiscal 2022, significant uncertainty still surrounds the continuing disruptions to global supply chains for key components and the threat of the pandemic.
Speaker 3: At the same time, we believe that these challenges will continue to force our customers to weigh carefully the degree to which they concentrate their supply chain on any one region and cede their design control to their outsourced partner.
At the same time, we believe that these challenges will continue to force our customers to way carefully.
The degree to which they concentrate their supply chain or in any one region in seed their design control to their outsource partner.
The recent macroeconomic events continue to force many companies to more fully recognized the significant impacts and elongated supply chain can have on both cost and availability.
Speaker 3: The recent macroeconomic events continue to force many companies to more fully recognize the significant impacts an elongated supply chain can have on both costs and availability.
The risks of IP appropriation in the attractiveness of doing business with an outsource partner, who can minimize their risk at all of these factors.
Speaker 3: The risk of IP appropriation and the attractiveness of doing business with an outsource partner who can minimize their risk on all of these factors.
These market trends and our capabilities should continue to power our growth over the long term.
Speaker 3: These market trends and our capabilities should continue to power our growth over the long term.
This concludes the formal portion of our presentation, Brent and I will now be pleased to answer your questions.
Speaker 3: This concludes the formal portion of our presentation. Brent and I will not be pleased to answer your questions. attention.
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Yes.
If you would like to signal for questions Star one.
And our first question today comes from.
Oh definitely.
With Titan capital.
Speaker 4: Thank you. So in the release, you noted the six new program wins, one of which was $80 million annual revenue. Congratulations.
Thank you so in the release you noted the six new program wins, one of which was <unk>.
80 million.
I know revenue congratulations.
Speaker 3: The other five, how would you characterize the size of those, please? From 5 to 15 million.
The other five are how would you characterize the size of those please.
From $5 million to $15 million per year.
For for all five of those.
Yep.
Speaker 4: Great, thank you. And then, would you characterize the supply chain situation in more detail than you did in your opening remarks, and maybe how it changed over the last quarter, where you're at today? And I'd love to ask when you see this returning to normal, but maybe just what you see coming maybe is the more appropriate question. OK.
Great. Thank you.
And then would you characterize.
The supply chain situation in more detail than you did in your opening remarks, and maybe how it changed over the last quarter.
Where you're at today.
And and.
I'd love to ask kind of when you see.
Returning to normal, but maybe just what you see coming maybe as the more appropriate question.
Okay.
There's two sides to that question Oh.
Speaker 3: want to be clear on that because it has important effects on our outcome.
I don't want to be clear on that because.
It has an important infection or outcome.
Besides that many people don't think about.
Speaker 3: at least for our business, is our customers' understanding of the situation. In the last year to a year.
At least for our business is our our customers' understanding of the situation.
And the last year or two a year and a half.
We've gone from.
Speaker 3: denial and anger. It's almost like the five steps of mourning, I guess, but we've gone from denial and anger to acceptance
Denial and anger, it's almost like the five steps of mortgage I guess, but we got from denial and anger.
Two <unk>.
Acceptance.
Speaker 3: to a willingness to plan and deal with the situation that we face today.
Two a willingness to plan and deal with the situation.
Isn't that we face today.
So.
Our customers as an average now are willing to.
Speaker 3: Our customers, as an average now, are willing.
Speaker 3: to give us much longer binding forecasts against which we purchase components.
To give us much longer binding forecasts against which we purchase components.
Speaker 3: are willing to much more quickly.
Are willing to much more quickly.
Speaker 3: agree to increases, I mean, short-term increases in...
Agreed to increases I mean short term increases in comp.
Speaker 3: component cost whenever we find some component on the gray market used to be probably
Component cost whenever we find some component on the gray market.
It used to be probably.
Two thirds of that time that.
Mining that we had done would go unfulfilled because it took our customers a long time, they decided they wanted to spend that extra.
Speaker 3: mining that we had done would go unfulfilled because it took our customers a long time to decide if they wanted to spend an extra, you know, 5x the normal price of the component.
You know five extra normal price of the component to get that component in.
Speaker 3: So that's going quite a bit better for us now.
That's going quite a bit better for us now.
Well, that's kind of the the <unk>.
Speaker 3: One side of the teeter-totter is how the customers are reacting and dealing with.
One side of the Teeter Totter is how the customers are reacting and dealing with.
The component shortages.
That actually there's another side of it.
Speaker 3: Then actually there's another side of it, so it's a three-way teeter-totter.
A three way Teeter totter.
Speaker 3: And that is how the customers are dealing with ongoing price increases.
And that is how the customers are dealing with ongoing price increases.
We have.
Been more successful in passing along price increases that are fair, but.
Speaker 3: been more successful in passing along price increases.
Speaker 3: beginning of this it was very hard to convince our customers they were fair.
At the beginning of this it was very hard to convince our customers that they were fair.
Now that this has become common knowledge and accepted people, let's see the inflation numbers.
Speaker 3: Now that this has become common knowledge and accepted, people have seen the inflation numbers.
Speaker 3: are themselves having a hard time hiring staff.
People are themselves, having hard time hiring staff and keeping it.
So that side of the equation too has gotten better that because of the situation has improved but because our customers understand and accept the situation more than they used to.
Speaker 3: So that side of the equation too has gotten better, not because the situation has improved, but because our customers understand and accept the situation more than they used to. On the other side of the equation,
On the other side of the equation.
The.
Component availability.
Sure.
Speaker 3: I'd say it's stabilized. It hasn't stabilized in a great place.
I'd say it's stabilized.
Has it stabilized in a great place.
Speaker 3: Excuse me, but it has stabilized so lead times are still a year to a year and a half
Excuse me, but it has stabilized so lead times are still a.
Our year to year and a half.
But they havent continued to balloon like they were doing.
Speaker 3: But they haven't continued to balloon like they were doing.
And there are less although still quite a few surprises on a day to day basis, when somebody calls us and says hey that Jim that was supposedly today isn't going to leave for six months.
Speaker 3: And there are less, although still quite a few, surprises on a day-to-day basis when somebody calls us and says, hey, that shipment that was supposed to leave today isn't going to leave for six months.
So I Wouldnt say on the supply chain side things have gotten better, but I'd say that they've stopped getting worse.
Speaker 3: So I wouldn't say on the supply chain side things had gotten better, but I'd say that they'd stop getting worse.
And as far as what I think this is going to turn around.
Speaker 3: And as far as when I think this is going to turn around, I don't really know. Our politicians continue to do crazy stuff.
I don't really know our politicians can do.
You need to do Crazy stuff.
I think the most.
Speaker 3: I don't know, the one that really gets under my skin is making all of the ships in LA Harbor go out and steam around the ocean so they can improve the way it looks from the air.
I don't know when that really gets under my skin is making all of the ships at L. A harbor go out in steam around the ocean. So they can improve the way it looks from the air.
Speaker 3: but there's just a number of examples where I'm not sure what's going to happen because I can't see the logic behind it a lot of what's going on. So that's my answer, Bill.
But there's just a number of examples where I I'm not sure what's going to happen because I can't see the logic behind it a lot of what's going on.
So that's my answer Bill.
Thank you Craig do you do you see.
In the next let's say three months between now and when we talk next that this is going to come.
Speaker 4: in the next, let's say, three months between now and when we talk next, that this is going to continue in this stabilized mode, or do you feel like we're at a bit of a transition where we could see a modest improvement begin in the next three months?
In this in this stabilized mode or do you feel like we're adding a bit of a transition where we could see a.
Modest improvement beginning in the next three months.
I think.
Speaker 3: You have to be optimistic to say it's not going to get any worse and it's going to be stable for a while.
You have to be optimistic to say, it's not going to get any worse and it's going to be stable for a while.
A I certainly wouldnt predict that it's going to get better in the next three months.
Speaker 3: I certainly wouldn't predict that it's going to get better in the next three months.
And your and your.
Speaker 4: and your guidance with seeing revenues increase.
And your guidance with were seen revenues increase.
Speaker 4: from the 135 to the one to, make sure I get your guidance here correctly, the 130 to the 140, but the 135 or 134 you did this quarter did include some customer reimbursements. So that upkick that you are seeing.
From the <unk> from the $1 35 to the one two.
Let me make sure I get your guidance I hear correctly, the 132 to the 140, but the one 135 or 134 you did this quarter did include some customer reimbursements, so that uptick that you're seeing.
Is that coming about because of components that were ordered many months ago and now it's coming together or is this a function of.
Speaker 4: Is that coming about because of components that were ordered many months ago and now is coming together? Or is this a function of products being built that don't have the same lead times?
Products being built that don't have the same lead times.
It is.
More of a combination of the three.
Speaker 3: three-sided teeter-totter, wish I hadn't started with that analogy, but I'm stuck with it.
The three sided theater tighter, which they hadn't started with that analogy, but I'm stuck with it.
Where we're at for this quarter is for the first time since all this began.
Speaker 3: Where we're at for this quarter is for the first time since all this began. The numbers were.
The numbers were.
We're projecting.
Are all pretty much.
Speaker 3: cleared in terms of parts showing up per plan. The last probably.
Cleared in terms of parts showing up for play it.
The last probably four or five quarters.
Speaker 3: We were trying to get parts confirmed. We believe we were going to get confirmed. And then we didn't get them confirmed. Whereas right now we're able to look out probably two quarters and see that.
We were trying to get parts confirmed we believe we're going to get confirmed.
And we didn't get them confirmed.
Whereas right now we're able to look out.
Probably two quarters.
And see that.
If we miss our numbers it will be only because.
We got a surprise phone call.
Speaker 3: Whereas in previous quarters, it could have been we got a surprise phone call or an anticipated confirmation did not come through.
Whereas in previous quarters. It could've been we got a surprise phone call or and anticipated cod.
Confirmation did not come through.
So as that clarity of the difference.
Speaker 4: it is so if i'm hearing this right your guidance is is more conservative this quarter because you have been given all call them promises that uh... the components will be there any and the only reason you would miss revenues is if those promises don't come through whereas in prior quarters you had you had made some assumptions sometimes your assumptions were accurate but if they weren't and that was uh... a revenue risk
It is so if I'm hearing this right your guidance is it more conservative this quarter because you have been given.
I'll call them promises that are the components will be there and the only reason you would miss revenues is it those promises don't come through whereas in prior quarters. You had you had made some assumptions sometimes your assumptions were accurate, but if they work and that was a revenue risk.
Speaker 3: Yeah, I don't know if I'd call it more conservative because we're trying to run the same path every time we give you a number.
Yeah, and I don't know if I'd call it more conservative.
Because what we're trying to run the same path that every time, we give you a number.
Speaker 3: But the situation has changed, as I said previously. So maybe it's...
But the situation has changed as I said previously so maybe it's <unk>.
Maybe there's less.
Less variability this the standard deviation is probably decreased a little bit even though we're still in the.
Speaker 3: Less variability, the standard deviation is probably decreased a little bit, even though we're still in the confidence. In the confidence, I don't know. I don't know whatever. That's why I try to give you the long explanation, because I don't fit. And I'll think just saying more or less conservative is the right word, but anyway.
Confidence in the conference I don't know I don't know whatever that's that's why I tried to give you a long explanation because they don't fit I don't think just saying more or less conservative is the right word but anyway.
Speaker 3: I think I am understanding. Thank you. Let me switch, if I may, to the U.S. facilities. You mentioned that they had good sales increase. How much were their sales up in this quarter versus the year ago fiscal Q2? Not much. They have been pretty flat for a long time.
That's how isolation.
I think I am understanding. Thank you Oh, let me switch if I may to the.
U S facilities, and you mentioned that they had a good sales increase how much were where their sales up and this quarter versus.
A year ago, our fiscal Q2.
Not much they've been pretty flat for a long time.
Probably three years.
Speaker 4: And so this increase that you are anticipating and the business that they are winning, that's a meaningful change in what's happening with those facilities.
And so this increase that you are anticipating and then the business that they are winning that's that's a that's a meaningful.
And and what's happening with those with those facilities.
Definitely.
Speaker 4: I'll ask one more question and then get back in line.
Okay I'll ask one more question and then get back in line. So.
Speaker 3: What in your mind has changed leading to the, what I think, 35% or so anticipated revenue growth with the U.S. facilities? Everything that we've talked about.
What what in your mind has changed leading to to the Oh, what do you think 35% or so our anticipated revenue growth with with the U S facilities.
Everything that we've talked about.
Has come to fruition.
Speaker 3: So it took a year and a half for people to decide that this...
So.
It took a year and a half for people to decide that.
This Asian.
Speaker 3: Supply chain risk wasn't gonna go away. It took people the first year of the Biden administration to realize that the Asian political situation
Supply chain risk wasn't going to go away it took people.
The first year of the buy and the administration to realize that the.
Asian political situation was not a.
Speaker 3: administration's specific issue. It was more an awakening of the economic certainties that are
Administration specific issue it was more an awakening of the economic.
Certainties that are that are operating now.
Speaker 3: And it just takes time for people, once they've made that realization, to survey the market, figure out that Keytronic is standing there with open arms saying, yeah, we figured this was coming, welcome aboard.
And it just takes time for people once they've made that realization to survey the market.
Our key tronic is standing there with open arms, saying, yeah. We figured this was tell me welcome aboard.
And then once they realize that it takes another couple of months for quoting and.
Speaker 3: And then once they realize that, it takes another couple months for quoting and kind of sight tours and all that. So this is pretty much exactly what we
Site tours in all that so this is pretty much.
Exactly what we hoped and thought would happen.
Yeah.
The real question, we're asking ourselves is does it continue at this pace or did we pick off a.
Speaker 3: The real question we're asking ourselves is does it continue at this pace or did we pick off a
Spike of people, who are the most desperate to find an answer and it'll go back to a more steady.
Speaker 3: spike of people who are the most desperate to find an answer and it'll go back to a more steady rate of
Rate of growth.
Speaker 3: I think it's going to continue, but I'm biased.
I think it's going to continue but I'm biased.
Speaker 4: Now, that's helpful. We appreciate your perspective. I'll get back in line.
No. That's that's helpful. We appreciate your perspective I'll get back in line.
Okay.
Speaker 1: Once again, if you would like to signal with questions, that is star one on your touchtone telephone.
Once again if you.
I would like to signal with questions that is star one on your Touchtone telephone.
Speaker 5: Again, that is star one if you would like to ask questions and.
Again that is star one if you would like to ask questions and our next question will come from Bill.
With Titan capital.
Alright, I guess I got into the back of the line is zero.
Speaker 4: All right, I guess I got in the back of a line of zero. So let me continue down the path, if we could. In a normal environment.
So.
Well, let me continue down the path if we could.
Hum in a normal environment.
Speaker 4: Assuming that one day we do return to that, and you have $130 million of revenue.
Assuming that one day, we do return to that and you and you have $130 million of revenues would you agree with with this math that essentially your SG&A.
Speaker 4: Would you agree with this math that essentially your S-GNA and R&D would be similar, except you would not be paying $700,000 to lawyers for the...
And R&D would be similar except you would not be paying a $700000 to lawyers for the for the inventory S. He see thing.
Speaker 4: for the inventory SEC thing.
Speaker 4: and you'd have roughly 9% gross margin.
And you'd have roughly 9% gross margins and otherwise and 25% tax rate.
Speaker 4: and otherwise, in 25% tax rate.
Speaker 4: and that would ultimately lead you to something like twenty three cents a share at a pinpoint number but let's just call it twenty to twenty five cents a share of earnings in a quarter or uh... uh... working up between eighty cents and a dollar uh... per share for a full year at the one thirty level is is that occur it's essentially a correct assessment of the business model or am i missing some important swing factors
And that would ultimately lead you to something like 23 cents a share as a pinpoint number but let's just call. It 20 to 25 cents a share of earnings in a corner or working at between 80 cents on a dollar per share of <unk> for a full year at the 130 level is that a kurt.
Kelly a correct assessment of the business model or am I missing some important swing factors.
I'd say, you got that pretty well sussed out the.
Speaker 3: I'd say you've got that pretty well Sust out the
It's not something that you can say is going to happen for sure because.
Speaker 3: It's not something that you can say is going to happen for sure because
Speaker 3: at 7% inflation, that means we have to be successful in passing all that through to our customers.
At 7% inflation that means we have to be successful in passing all of that through to our customers.
If you continue to see mcdonalds close down because they can't hire people, we're not going to be able to get enough people to do it so.
Speaker 3: If you continue to see McDonald's close down because they can't hire people, we're not gonna be able to get enough people to do it. So...
Speaker 3: If you assume all that away and say we're back to normal, then your model is correct.
If you assume all that away and say we are back to normal then your model is correct.
Alright, no I recognize there are some what used to be easy assumptions and they seem a little more lofty these days.
Speaker 4: Right, no, I recognize there's some, what used to be easiest assumptions and they seem a little more lofty these days. Let me take this one step further. I think Brett, you had commented that you're at unprecedented demand and you were at greater than 160 million of...
Let me take this one step further.
I think Brett you had commented that you are.
Unprecedented demand then and do you worry at greater than 160 million.
Demand.
Which which would be meaningfully above the 130 million that I just used with it with my simple simple math.
Speaker 4: which would be meaningfully above the $130 million that I just used with my simple math.
Speaker 4: Is it a correct assessment that there are some economies of scale, meaning that the business model, again, assuming away all of those factors that are difficult at the moment to assume away, but that you would then have some leverage in the business model on the SG&A and R&D side, and frankly, maybe even the gross margin side? Hi.
Is it a correct assessment that there are some economies of scale, meaning that the business model again, assuming a way all of those factors that are difficult at the moment too to assume away, but that you would then have some leverage in the business model on the SG&A and R&D side.
Maybe even the gross margin side.
I, what I would say that.
Speaker 3: Probably maybe, but I'd also say that you don't even need to assume any of that to come up with profit numbers that are pretty startling.
Probably maybe but I'd also say that you don't even need to assume any of that to come up with profit numbers that are pretty startling.
If you can get to $160 million a year I mean, a quarter in revenue.
Speaker 3: If you can get to 160 million here, I mean a quarter in revenue.
Speaker 2: Understood. No, I'm totally in alignment. So I'll take the bait and ask what is it going to take to reach that 160 quarterly revenue run rate? Do we just need to wait for some time to pass because you've already ordered parts at these levels and so it's just simply a matter of time where there are other factors that need to be taken into account. Or whoever is not just part of its people.
I understood I am totally in alignment so.
So I'll take the bait and ask what what is it going to take.
To reach that 160, a quarterly revenue run rate do we just need to wait for some time to pass because you've already ordered parts.
Parts of these at these levels and so it's just simply a matter of time or are there other factors that need to be taken into account.
Remember, it's not just parts its people.
Hard to already are.
Yeah, you can order people ahead of time.
Speaker 3: So that's the big issue is what's going to happen with the labor supply in the state.
So that's the big issue is.
What's going to happen with the labor supply.
In the states and in Mexico.
As well as the.
The componentry.
Alright. Thanks for the reminder, it easy for me to be a myopic on the one on the one issue like.
Speaker 4: All right, thanks for the reminder. It's easy for me to be myopic on the one issue. Let me, anything else that you would like to add to that?
Uh huh.
And anything else that you would like to add there.
Add to that.
Nope.
Alright, well, we will we will anxiously await our you are ordering the parts and finding the people to to generate that $160 million of quarterly revenue.
Speaker 4: all right well we will we will anxiously await to you ordering the parts and finding the people to generate that hundred sixty million of quarterly revenue uh... not quite as anxiously as i will be but
Not quite as anxiously as I will be but.
Speaker 4: be in this together. I understand. Let's switch to Vietnam if we could please.
It will be in this together alright, I understand let's switch to Vietnam, If we could please.
How are you.
Speaker 4: I haven't paid attention to Vietnam and their COVID lockdowns. I know they, in the past, had been pretty strict. What's the update there, and how are your existing...
I I haven't paid attention to to Vietnam and their Covid Lockdowns I know they they in the past had been pretty strict what's the update there and how are how are your existing.
Speaker 4: And separately, your new customers or new prospective customers viewing moving product into the Vietnamese facility.
And separately, your new customers or new perspective customers viewing them moving moving product into the Vietnamese facility.
Speaker 3: OK, I'm going to answer a question that you should have asked, too, along with this.
Okay.
I'm going to answer a question that you should ask too along with this.
Speaker 3: The Vietnam situation is still tightly locked down even though they have opened up the actual paper
The Vietnam situation.
It's still tightly locked down even though leaves they are have opened up the actual.
Paperwork and.
Speaker 3: testing and everything required to get in there is still really really hard to get passed. So it's going to be I think another quarter or so depending on what happens with the next strain of COVID before we can actually start to unlock all the potential of Vietnam.
Testing and everything required to get in there is still really really hard to get past. So it's going to be I think another quarter or so depending on what happens with the next strain of Covid.
Before we can actually start to unlock all of the potential of Vietnam.
The programs that are they're running great. We have won a couple of programs.
Speaker 3: The programs that are there are running great. We have won a couple of programs with our customers.
With our customers.
Actually giving us business, there without ever actually seeing.
Speaker 3: actually giving us business there without ever actually seeing the site other than on video tours
The site other than on video tours.
So we continue to believe that Vietnam is a really good future. Its just that we can't get people in there yet to add new business.
Speaker 3: So we continue to believe that Vietnam has a really good future, it's just that we can't get people in there yet to add new business. The question you didn't ask is the future of our Shanghai operation.
The question you didn't ask is the future of our Shanghai operation.
Which is also pretty encouraging.
We have never really been able to crack the code of <unk>.
Speaker 3: China business built in our Shanghai plant to stay in China. And over the last year we've won a number of new pieces of business. One of them we announced in this sixth, this quarter.
China business built at our Shanghai plant to stay in China.
Over the last year, we've won a number of new pieces of business one of them, we announced in this six this quarter.
Speaker 3: that are going to be built in Shanghai and ship to a Chinese factory and were won, the business development was performed by people in our Shanghai.
That are going to be built in Shanghai.
And ship to a Chinese factory.
And were won the business development was performed by people at our Shanghai.
Facility.
So that's one of us about four.
Speaker 3: So that's one of about four new business wins there over the last three quarters that are hugely encouraging.
New business wins, there over the last three quarters that are hugely encouraging.
To us for the future of the Shanghai plant two.
Speaker 3: to us for the future of the Shanghai plant too.
Craig what what has changed to to lead to that because I have had historically been under the the Oh assumption is that China was producing for somewhere else in the world not are not producing for China or I should say your Shanghai facility.
Speaker 4: Craig, what has changed to lead to that? Because I had historically been under the assumption that China was producing for somewhere else in the world, not producing for China, or I should say your Shanghai facility.
<unk>.
Yeah, that's been the case and we've had to make quite a few operational Ed.
Speaker 3: Yeah, that's been the case. And we've had to make quite a few operational and...
Uh huh.
This is procedural strategic structural changes to the way we run Shanghai.
Speaker 3: procedural strategic structural changes to the way we run Shanghai.
Speaker 3: to make it a viable competitor for Chinese business.
To make it a viable competitor for Chinese business.
There are a lot of unique requirements for the Chinese market.
Speaker 3: There are a lot of unique requirements for the Chinese market that you can't fulfill.
That you can't fulfill from.
The states.
So we've made those changes took a risk and it turned out to be successful.
Speaker 3: So we made those changes, took a risk and it turned out to be successful.
Congratulations let me, let me switch to a different angle on that that.
Speaker 4: Congratulations. Let me switch to a different angle on that that I haven't thought of before, so apologies for this question maybe not being well thought out. But given the amount of business that we hear about moving away from China, that seems as though it would lead to excess or at least additional capacity being available in China.
I haven't thought of before so apologies for this question, maybe not being well well thought out.
But given the amount of business that we hear about moving away from China that seems as though it would lead to excess or at least additional capacity being available in China with that in mind.
Speaker 4: With that in mind, why have you won four different, four different?
Why have you won four different for different.
Speaker 4: program wins with my theorized additional available capacity, probably by Chinese firms.
Program wins with my theorized to additional available capacity.
We buy Chinese firms.
Well.
I don't want to be slip so I'll just say.
Speaker 3: It's a very good facility. We've been running it for over 20 years. It's backed by the design.
It's a very good facility, we've been running it for over 20 years.
It's backed by the design team here at corporate.
Speaker 3: So there are some attributes that our Shanghai facility has that are not all that common.
So there are some attributes that our Shanghai facility has that are not all that common.
On the competition in the competitive landscape in China.
Speaker 3: on the competition in the competitive landscape in China.
Okay. That's helpful and so is are these four wins.
For Chinese companies selling in China or are they for companies.
Companies outside of China.
Want to build in China to sell in China.
Both.
Excellent.
I'm going to ask another question since our since the line didn't seem to be a very long.
Q.
Welcome to our.
To kick me off if he would like here at any point.
The customer reimbursements that you referenced I think this is the first time that we've seen that called out in one of your press releases would you discuss kind of what the dynamics, there are and and what what's different now.
Well, that's completely a result of new business wins.
That doesn't require custom tooling to be made there.
Designs to be completed.
And custom equipment to be purchased at all of that is reimbursed for us by our customers.
So that's why there's not much profit on it but it's a hard bringer of.
Production to tell them.
So we should view this as a very favorable.
Indicators of the future.
Of the long term future yeah, because these programs they're big.
So the $80 million one won't start production until.
Late summer.
But tooling is already being purchased and equipment is already being purchased.
That will be used in the ramp of that program at the end of the summer.
And.
That's not the only program that was in that bucket of reimbursed tooling and equipment.
Yeah.
Yeah.
And.
Is it fair to say that any customer who is going to spend money on tooling. It ends up being pretty serious and I I mean, they're moving forward.
And I'm really trying to contrast this too.
I think what's pretty well known in the industry is.
Yes.
More more program wins than than actual.
New business that ramps somehow it just ends up disappearing.
Well for sure if somebody plants down $5 million for tooling.
It means that they have every intention of using that $5 million of tooling.
Right.
Right.
Stating the obvious I guess thanks for.
Being a polite about that.
Let me Uh huh.
Let me shift if I could to the to the customer 80 million Oh before you before I do that though there's yes, there's kind of a.
Poster child case, that's going on that are.
Another chunk of change in that it's actually $20 million of customer reimbursements last quarter in total.
And this is a customer who had for years.
Purchase their product out of China.
And actually had little to no.
Manufacturing.
And engineering expertise.
So that program will take us probably two years too.
To move into our facility in Juarez.
In that case the customer.
It's actually <unk>.
Backstopped us for a lease on another 100000 plus square feet.
We'll be purchasing.
So close to $10 million worth of specialized equipment.
Equipment to build that product.
And we will spend a year learning with us how to build that product since they are the people who knew how to build it up kind of drifted off as their production was more and more in China.
And this is kind of a poster child for a number of opportunities that we're in the midst of.
Hopefully finalizing of companies like that.
Who are in essence branding and ideation companies that need a partner.
Ooh replace.
What has become too risky with their supply chain spread out across the world.
So that's why I say, it's a long term upside when you see a big investment happening with us it could be a two year lag between the time they spend $10 million.
At the time, we start cranking out product.
That's really helpful. Thank you.
So you mentioned you're hoping this is is.
One of the first and this sounds.
Sounds quite large like you say, if your plunking down $10 million, that's that's a no small number.
Yes.
Or are the additional opportunities that you are pursuing.
Of the same size or is that one unusually unusually large.
I would say they tend towards that side.
So in essence, the ones that are or it's important enough to them too.
To buy equipment on behalf of their contract manufacturer those are the customers that tend to be larger and it sound where seems like they would also be stickier. Once they are once they ramp.
Yeah. They are for sure stickier and there also.
What's the right word.
It's very clear to them that what we've built here in the company.
It starts to become their only answer.
When they're looking for.
Somebody who's interested in an $80 million project somebody who has experience learning how to build everything from toilet Bowl cleaners to slot machines.
Somebody who has a decade and a half of pulling projects out of Asia and moving them into the states.
Somebody who has a design team that can work with their ideation group to bring their designs into production.
Somebody who has experience in working with.
The Asian soon to be ex source.
In.
Re gathering the data and expertise required to make the product.
When you start checking off all those boxes and looking across the competitive landscape you come up with key tronic and that's about it.
And so if that's the case as opposed to Justice supplier you become more of a partner is that a fair speculation.
You bet.
Yes.
Well, we look forward to seeing that to see that develop and maybe that's a good segue to the $80 million a win that you announced with the power equipment accompany this quarter would you walk us through that.
How has that developed.
And and why you were the one who is ultimately chosen.
So it's.
That's a good good poster child.
That company originally hired a.
Consultant for to try to help them find somebody because they were not having any like fighting it on their own.
Yeah.
They needed.
Design skills.
And both metals and plastics.
They needed.
Julie.
Acquisition and design and try out skills.
They needed commodity specialists that good deal in the worlds of.
Metals, and plastics and other things that I'm not going to mention because it'll give it away.
And by the time.
I mean, it took a year for us and them.
To get to know each other well enough.
That we could lay out a winning proposition both for them and their end customer.
So you know that that will be a sticky program, because there's going to be rough to find somebody else like us to do that in the future.
And you said this one is going to begin.
This summer.
Late summer.
So late late in and our fiscal Q1.
Yep.
And how does it cause you currently envision the ramp to take place how do you go Oh, what's the slope of going from starting late Q1 to one year at a fall 20 million per.
Per quarter run rate.
Again, God is punishing us by answering our prayers, so it's a steep ramp.
So since I, just sit behind a desk and don't actually do any real work is a steep ramp mean that by the December quarter, you're at $20 million or as a steep ramp over the course of the year.
The steep ramp is over a quarter.
So literally is September quarter, you could start the start producing and be at a 20 million dollar right.
Revenues from that customer in the December quarter.
And so we're hoping.
Excellent well I think I will leave it there because that takes us pretty darn close to that are 160 million that we talked about earlier, thanks for taking all my questions.
You bet. Thanks Bill.
And our next question will come from George Melas with <unk> management.
Hey, guys.
Hey, George.
And thank you Bill after all your great questions, they always a pleasure to listen to.
Just a quick question on Capex.
Next was relatively low this quarter.
And I think that you said you guys. Brad I think you said you expect it to be $6 million. This fiscal year, which I think is the slight tick down from the previous forecast.
On this strong revenue and revenue growth. It seems capex is coming down so something is working right. There can you sort of explain that.
Yeah, I think we've mentioned previously George that we've got capacity.
And we're also as Craig mentioned.
Being reimbursed for program specific equipment.
So the combination of those two things we're monitoring it closely but our intent is to have <unk>.
Less capex this year and see some revenue growth.
Okay. Thank you.
Exactly.
During fiscal 'twenty three.
Was it too.
That's too far that's too far George.
You know typically we're spending $8 million to $10 million.
For fiscal year, <unk> Capex and my expectation is that it would return to something close to that.
The next fiscal year.
Okay.
And then just to understand.
It will be and when do we get in this quarter.
Okay.
No.
Hi.
What have they been in.
In the past few quarters in the last two years.
Sure.
Oh.
Not that high that was one of the reasons why we.
Disclosed.
The year over year changes that this quarter in particular.
Was significantly higher.
And even some of the sequential quarters that we've just gone through.
And is it right that it was roughly 20 million and it's roughly $10 million.
A year ago.
No let me it's roughly.
It is $10 million higher than it was a year ago.
In any one particular quarter will have $5 million to $10 million.
Okay can you see just how much it was this quarter.
I understand.
Just over 15.
Okay.
Okay. So if we sort of normalize for that.
It means that they where we can see sort of the production delays and the issue with <unk>.
But to put us as we ask that out.
Yes.
Okay.
That's it for me Thank you guys.
Thanks, George George.
Thank you. Our next question will come from Sheldon Grodsky Grodsky associates.
Good afternoon everybody.
I have a few questions, but there'll be quicker.
When do you expect your legal expenses to disappear.
If they ever will.
Adding the inventory issue.
We have no comment on that.
Great Okay.
I noticed that your average shares outstanding went down for the quarter or is that just because the stock price went down or did you buy back any shares.
We did not buyback any shares.
Okay.
There was a big jump in inventories I guess.
Partly because we were able to get something with are you hoarding.
Inventory at this point.
[laughter] Oh do you want to buy it.
Yeah.
We are not we are not holding this is all a result of being able to get all but one part and then we can't build the product and all the rest of those parts sit there unused.
Uh huh.
This is a bad reason for having that okay.
And one more question.
When your customer reimburses you for the equipment.
It's going to be as equivalent to your equipment.
When the project is done.
It will be his equipment when the project is done but historically by the time the project is done.
The equipment is all used up anyway.
Okay.
I just have a few quick things here.
Okay. Thank you.
Thank you and that does conclude the question and answer session I will now turn the conference back over to you.
Okay. Thanks again, everybody for participating in today's call, Brett and I look forward to talking to you again next quarter.
Right.
Thank you.
Does conclude today's conference we do thank you for your participation have an excellent day.
Okay.