Q3 2022 Key Tronic Corp Earnings Call
[music].
[music].
Please standby.
Good day and welcome to the Q3 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.
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 the Spokane Valley headquarters is Craig Gates, our President and Chief Executive Officer.
As always I would like to remind you that during the course of this call we might make projections or other forward looking statements regarding future events 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, our latest 10-Q quarterly okay.
Our latest 10-K quarterly 10, Qs and eight case.
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.
Today, we released our results for the quarter ended April two 2022 for the third quarter of fiscal 2022, we reported total revenue of $138 $4 million up 3% from $134 6 million in the same period of fiscal year <unk>.
'twenty one.
For the first nine months of the fiscal year 2022, total revenue was $405.6 million up 5% from $386 1 million in the same period of fiscal year 2021.
Our year over year sales have increased and customer demand has even been higher but production continues to be constrained by global supply chain and transportation issues and.
In the coming quarters, we expect a ramp.
A number of new programs, including the previously announced program with a leading power equipment company or.
Mexico facility in the first half of next fiscal year.
During the third quarter of fiscal year 2022, our results were again impacted by intermittent parts supplies factory downtime and overtime expenses.
In addition, our facilities in Shanghai, China have been closed for.
Government government mandated COVID-19 closures for six weeks since mid March.
However, we expect operations to resume shortly additionally.
Additionally, our legal costs related specifically to the SEC's review of last year's whistleblower complaint totaled approximately six cents per share during the quarter and we expect legal cost to potentially continue at a similar pace in coming periods.
Despite these headwinds we select we slightly improved our margins for third quarter of fiscal year 2022, our gross margin was eight 3% and operating margin was 2% up from a gross margin of eight 2% and operating margin of one 9% in the same period a fish.
<unk> year 2021.
For the third quarter of fiscal year 2022 net income was $1 million or nine cents per share up 16% from point 9 million or eight cents per share for the same period of fiscal year 2021.
For the first nine months of fiscal year 2022, net income was $2 $4 million or 22 cents per share.
Compared to $4 2 million or 38 38 cents per share for the same period of fiscal year 2021.
The year over year change is predominantly a result of increased legal expenses and higher interest expense.
Turning to the balance sheet, we continued to maintain a strong financial position.
Despite despite supply chain and COVID-19 related production delays in the third quarter of fiscal year 2022 and the continued ramp and transfer of new programs, we managed to lower inventory by approximately $3 million.
From the prior quarter.
We are carefully balancing customer demand and the likelihood of successfully bringing in parts in time for our planned production.
The state of the worldwide supply chain now requires that we look out much further in the future than in historical periods.
It's your quarters, we expect to see our net inventory turns.
Slowly improves to more historical levels.
At the end of the third quarter trade receivables were up about $14 $4 million from the prior quarter, reflecting the timing of shipments late in the quarter.
Our Dsos also increased to about 92 days, which reflects both timing of shipments during the quarter and some delays in payments from customers, who were also impacted by pandemic related slowdowns and restarts in their respective markets.
Overall, our balance sheet had total working capital of $179 $8 million in a current ratio of 2.1 to one.
Slightly from the prior quarter.
Total capital expenditures were about $4 1 million for the first nine months of fiscal year 2022.
We're keeping a careful eye on expenditures during fiscal 2022 and we expect our capital expenditures for the full year to be around $6 million.
We plan to continue to invest selectively in our production equipment, SMT equipment and plastic molding capabilities as.
As well as make some efficiency improvements in our facilities to prepare for growth and add capacity.
Despite growing customer demand and backlog, we expect that the ongoing disruptions from the global supply chain and COVID-19 issues will continued to significantly limit production.
And adversely impact operating efficiencies, particularly for our China based facilities for.
For the fourth quarter of fiscal 2022 we expect to report revenue of approximately 125 million to $135 million and earnings per share of approximately four to 10 cents per diluted share.
We're working closely with our customers key suppliers and employees to minimize the effects of delays.
<unk> two the continued global pandemic increased global freight and logistics costs and a limited availability of key components.
While our facilities in the U S Mexico and Vietnam are currently operating and our China facility is expected to reopen soon uncertainty still exists as to the possibility of future temporary closures customer fluctuations in demands and costs future.
Hi chain disruptions during the rapidly changing COVID-19 environment and other potential factors that could significantly impact operations in coming periods.
In summary, we continue to grow our pipeline of new sales prospects and continue to increase our customer demand to unprecedented levels for key tronic. Despite.
Despite the fact that supply chain disruptions in the pandemic continued to be an image continued to impact our business during the third quarter and remain risks risks in future periods. We are encouraged by our prospects for the growth for the coming fiscal year and beyond.
The overall financial health of the company appears strong and we believe that we are increasingly well positioned to win new EMS programs and.
And to continue to profitably expand our business over the longer term.
That's it for me Greg.
Okay. Thanks, Brett.
We continue to face stiff headwinds from worldwide supply chain challenges and pandemic related shutdowns.
Pleased with the successful ramp of new programs and our expanding customer base in the third quarter of fiscal 2022.
During the third quarter the industry continued to face persistent worldwide shortages in the supply of key components, particularly for electronic parts.
These shortages have extended production timing and cause transportation costs to triple.
Had it not been for the supply chain issues.
We believe burgeoning customer demand would have driven revenue for the third quarter in excess of $160 million.
Unfortunately, we do not expect the supply chain disruptions to improve significantly in the short term.
We also struggled with increasing labor costs and shortages of production staff at some of our sites as a part of industry wide labor shortages.
At the same time concerns about global logistics problems or in Ukraine.
And China U S geopolitical tensions continue to drive heightened supply concerns.
And the favorable trend of contract manufacturing returning to North America.
During the third quarter of fiscal year 'twenty to 'twenty two.
We won new programs involving outdoor recreation, RFID industrial connectivity and electric mobility products.
As you will recall from Q2, we previously.
The analysis of significant new program win with one of the world's leading power equipment companies.
Which we expect to begin manufacturing in the first quarter of fiscal year 2023, and once fully ramped could contribute approximately $80 million in annual revenue.
We would not have won as many programs without our design capabilities and their multi region footprint.
Which is designed to be the ideal solution to our customer supply chain issues.
During the third quarter of fiscal 2022 we saw an increase of production across both our U S based in Mexico based facilities.
Moreover, production at our new Vietnam facility continues to grow and we expect big things from our <unk> facility in the future.
As we discussed on previous calls the pressures on our customer base to lessen their Asian supply concentration remained very powerful.
Demand for North American production continues to grow.
With no foreseeable end tariffs intensifying political tensions between China and U S increase.
Increasing Asian production costs and time to market and.
And a weakening U S dollar.
These factors have driven a significant increase in our business.
He tried to CASM nerves as the ideal answer to overcome some tracing of Asian supply and for onshore North America.
<unk> for those companies with programs in the range of 5 million to $100 million.
We believe we provide everything needed to make supply chain diversification easy less.
It's risky and less costly.
Our solution set provides companies with both local sources for low volume products.
Our low cost sources close to geographic markets for higher value products.
We also attract the companies that have been overly concentrated with an Asian source it.
It has are more likely to have lost engineering control.
We can facilitate the move of production or 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 listen lessen the risk time and cost involved in a transfer.
Moreover, after a decade of developing testing process for a staggering array of products. We can onboard just about any product imaginable.
Moving into the fourth quarter of fiscal 2022 significant uncertainty still surrounds the continuing disruptions to global supply chains for key components and the threat of the pandemic.
At the same time, we believe that these challenges will continue to force our customers to weigh carefully the degree to which the concentrates or supply chain or on any one region and see their design control to the outsource partner.
The recent macroeconomic events continue to force many companies to more fully recognize the significant impacts any law engaged supply chain could have on both cost and availability.
The risks of IP appropriation and the attractiveness of doing business without sports partner, we can minimize our risk at all of these factors.
These market trends and our capability should continue to power our growth over the long term.
Twitter and you came in at the high end of the revenue range in spite of Shanghai being locked down for two.
Two weeks of the quarter and the high end of EPS range with with six sensitive SEC Caution there can you talk through kind of what what happened in the quarter that led to a led to that successfully.
Well for a while there we thought the supply chain was getting a little better.
And the effects of the Ukraine or had impacted the parts that we had almost here or here.
So we're able to get a little bit better in terms of closer to what our customers wanted and what we had the capability to build.
So we're at a revenue position that becomes pretty.
Leverage.
For our profit as we start to inch our way of that.
Things that are good happened to profit and that's that's the basic understanding if we can get parts.
Things look good and if we can get a lot of purchase things look really good.
And on that note your.
Your.
Q4 guidance is to be down from the third quarter. So is that due to the lockdowns are is that due to component availability.
Including the Lockdowns is it customer demand has is this weekend are temporarily in this quarter.
What's the what's the dynamic here.
Customer demand has not weakened.
Its parts and Lockdowns.
And are you seeing new component.
Problems.
Or where is this a continuation of the same and so it's really primarily the lockdowns would be via the app.
At the margin change if you will sequentially.
No. It's it's both so there are new components.
Causing problems there is logistics issues that are causing problems.
And it's Lockdowns shut the factory down for a while.
Okay. That's that's helpful. So with that in mind, how are how is it that you are.
Envisioning ramping this new business in.
In the in the first quarter. So so June quarter is is hampered but the September quarter. It sounds like you're anticipating a meaningful ramp.
And and yet I suspect the supply chain issues are not going to alleviate between now and then what's what's the dynamic that's allowing that to that improvement.
The supply chain issues are.
Specific to products.
This product happens to have.
Number of its components coming out of the states.
And.
The rest of the components are all being fabricated by us.
So we're in a better than normal shape.
Today.
Then.
What we are on a number of other products.
Yeah.
So.
Craig, let's kind of work the math here a little bit if it if ultimately this could be 80 million, that's 20 million a quarter.
Do you are you how quickly do you see the business potentially ramping to that $20 million a quarter and it sounds like from what you. Just said, we actually have more confidence that you might actually be able to to have the components to to ramp that 20 million, if if and when we do.
Get to that point.
Okay.
That product is going to ramp.
In the.
Middle to end of Q1.
And into Q2.
It should go very quickly.
Should be very strong as it's somewhat seasonal product.
So may I infer from that that you're thinking that that according to what you know now that that one one piece of business could be approximately $20 million in the in our in the Q2 the December quarter.
Well Hope Springs Eternal Bill.
Understood and so if we are if we are starting from a point of roughly $130 million.
Or so maybe that number is able to move up a little bit between now and then we could be looking at a December quarter that is is nicely north of $150 million in revenue.
It could be that's why we keep saying it all these discussions that if we could get parts, we'd be at $160 million plus.
Understood and I'm going to take this one step further and you're in your opening remarks, you referenced the the the operating leverage in the business. So with additional revenues that theres a good profitability that comes from that.
Is there anything about.
What we're discussing here relative to the December quarter, it wouldn't that would hamper that normal that normal leverage.
I don't think so.
But again the world is filled at risk. So I can't tell you for sure what's going to happen.
Oh I understand we've had plenty of unknowns for sure, but I appreciate the perspective and thanks for the time.
You bet. Thanks Bill.
Our next question comes from Sheldon Grodsky Grodsky associates.
Good afternoon, everyone.
Let me follow up on the on the last round of questions.
I know I know, it's a tough hypothetical but if.
Supply chain issues or what used to be considered normal levels, rather than today's level, how much level of business. Do you think you would have done let's say in the March quarter.
Okay.
If the supply chain issues have been.
Normal.
We would've been running $160 million plus all this year.
Okay.
So.
No. Unfortunately.
<unk> been one of my best ore shoot.
On supply chains, and you you've been kind of pessimistic for as long as I remember us talking about supply chains, but.
You you hinted that you had a moment and there were things that were looking more normal do you have any sense.
You sound like you're still fairly pessimistic about clearing these things up.
How do you think there's a chance in a year the world could be back to normal or.
That's that's being too optimistic.
There's in my mind.
There is no way the world would go back to normal in a year.
It could be trending in that direction.
But there is so much pent up logistics.
Factory.
Raw materials congestion.
We're looking at.
A long time more than a year before this rights itself.
Okay.
I'll, let someone else take the floor.
Uh huh.
Thank you.
Okay.
And once again that is star one to ask a question.
Okay.
Yeah.
We'll take our next question from George Melas with <unk> K H management.
Hi, guys.
Hey, George.
A question on inventory.
Hum.
I said in your remarks that.
Did you expect inventory turns to start to increase.
And to sort of increase progressively over a period of time can you can you sort of tried to keep a little bit more color on what you expect and what's your inventory situation right now.
Right now we have too much we expected to get better [laughter].
Hi, Greg.
[laughter], sorry, sorry, but.
The beat behind that is that for the past.
Probably two years prior to this last quarter.
We've been missing our forecast as we went into the quarter by as much as 25% to 30 million every quarter. So by that I mean, we'd start out thinking we're going to build 160.
And we ended up building a 125.
Right. So we've done we've done two things.
We've been able to make some.
It's a pretty cool enhancements to our MRP systems in our forecasting systems.
We have.
<unk> been able to use those in conjunction with.
Our customers better understanding of the situation we face.
And we've been able to work in more of a partnership.
Scenario with our customers so that they understand that key tronic.
Can't and won't go by 99 parts on the bomb.
In the hopes that that last 100 part will suddenly become available in the marketplace.
So a number of our large customers have signed up to step in and purchase those 99 parts. If we have indeed bought them.
In the hopes of freeing up that last part.
And we probably I said, we miss about $30 million from start to end of the quarter.
But as we go through the quarters Theres, probably another 30 billion that's at risk as we chase.
Chase around the world trying to find the components.
So having our customers understand and support us.
In the effort to try to make their production needs.
Come to fruition.
As has had a big impact on what our inventory has done is it's going to do in the future.
Also we have convinced many of our customers that they're going to have to look out a year and a half to two years and give us firm commitments. So that we can order parts against them.
And that's been an education process over the last two years.
So we're getting.
Better or delta between the beginning of the quarter and ended the quarter on what we thought we were going to build versus what we actually billed.
So if the world wasn't steady state.
Fad steady state.
Would have expected some.
Pretty nice reductions in inventory over the next coming quarters.
As the World has entered back into a pretty sorry state it's much worse than it was a quarter ago.
Still are hopeful that those.
Three aspects that I've outlined will continue to operate.
But just like every where do we sit in this call. We don't really know what the hell is going to happen.
Okay.
How much inventory now do you hold that's actually being purchased by your customers.
The number of Brett was about.
Yes, we are.
In excess of $40 million at this point.
Wow Okay.
So great numbers.
There were certainly some.
Looking at them to begin with.
Right right.
Hum.
Yes.
On the China situation.
In the sort of shut down the Shanghai plant.
Can you sort of an estimate what's the EPS impact.
Quarter.
If the plan.
We're too.
Would you be operational during the whole quarter versus what you forecast.
We have factored that in.
Two our forecast is probably.
I don't know two or three better if they had run the whole quarter.
Okay.
Okay.
And then.
Okay.
Just to follow up on Bill's question on the ramp up of the highway equipment customer in the second half of the calendar year.
Is that I think thats a customer there from.
From a working capital perspective, that's somewhat different because they are paying for more things themselves but.
Do you expect sort of a <unk>.
Average corporate profitability on a customer like this I mean do you expect like good.
Eight or 9% gross margin on the customer.
I don't maybe I'm being too specific I'm sorry.
Yep, you being too specific and you're you're forgiven.
[laughter], that's the only answer I guess.
[laughter].
Okay.
Try another thing then.
Jeff in terms of gross margin overall, you had the disruption in trade is expensive labor is more expensive. This disruption to production schedule you expect to get back to a 9% gross margin in the next.
12 to 18 months.
Yes, yes.
And what would what needs to happen for you to get back to 9% gross margin.
The simple answer is revenue.
Yes.
Okay.
Even if you don't get the revenue.
It seems like it's more likely you'll get the revenue, but the one thing that's really impeding. The gross margin is it not so much the leverage it seems it's the disruption to operations because of the supply chain.
Well at the current revenue level.
If everything was running.
Well and continuously I don't think we'd have any problem getting up to 9%.
Right.
Oh.
And if if we were to jump up into the 150 or 160, <unk> and things are still continuing to run ugly.
Should be able to get at or above the 90%.
But if things run Coyote ugly I don't know whats going to happen.
[laughter] gradations okay.
And if you just look at it from a regional perspective, if you don't get China, Mexico U.
Now of course, the U S and Vietnam, It's the biggest part of the business, but is there some areas.
Weakness from a profitability perspective.
Or is it pretty much similar actually.
It's actually pretty encouraging.
Yes.
U S facilities over the next 12 months.
We'll grow by almost 40%.
And this is the first time, we've seen any significant growth with that group of factories since we bought them.
Yes.
So that's that's a really tough.
Concrete piece evidenced when we talk about people, bringing business back to North America.
And becoming.
Correctly gun shy about trying to get.
The low volume parts built offshore.
That that sales process, which used to be.
A lot of convincing an and.
Schmoozing and everything else.
And now become.
Much much easier as people have been nursing their wounds from having gone too far the other direction.
So.
That part of the business, which had been <unk>.
Profit challenged in the past now looks to be very healthy.
The war is facility as I said earlier, if we can just keep it at ugly.
He is looking good Vietnam is looking good.
China is actually looking.
Better than it was in the past as we've been able to land more.
China business for China for that facility.
So we're at a point, where if we can just get parts.
This would all be kind of fun.
Unfortunately, we cant get parts.
In no way resembles Swan.
Okay. Thanks for your hard work guys.
Oh, yeah. Thanks, Jeremy Thanks for being a long term investor we appreciate it.
We'll take our next question from Bill <unk> with Titan capital.
Alright, Thank you and thank you for those.
Comment on the discussion before that was a helpful.
But let me start with just an accounting question if I if I may a other.
In the long term assets or is the other line item, which a year ago was about 1 million four but it's been growing like last quarter or two quarters ago. It was $8 2 million in this quarter to 11 three.
Brett.
What's behind that number and tear anything interesting to discuss here.
No.
No I think a large portion of that other long term.
Set.
Oh no.
I'd have to look further at the details can you give me a minute if you have another question.
I can certainly rushed up another question.
So.
[laughter]. Thank you Bret I appreciate it.
We will now be mine.
[laughter] relative to the current.
Current lockdowns and in China, Shanghai et cetera.
Has have you already seen component deliveries be hurt by by those Lockdowns.
And and have that incorporated into guidance or is it is it all.
This appropriate anticipation of of problems.
We have already seen.
Delayed shipments and actually shipments that we do not only delayed or we don't know when we're going to get them.
We've tried to factor that in but.
Every day is a lockdown and continues in spreads from city to city.
We're not sure if we factored enough in or not.
Yeah.
I understood I had assumed that six weeks would be a long enough time, it would start to show up but up to this point have not heard of any other companies, specifically, saying, it's impacting them and it just didn't seem that didn't seem logical to me.
It's starting.
Yeah, No. That's that's fair so I.
I think in response to a prior question. It was referenced that you all have about $40 million of inventory that the customers have paid for is that included in the 155 million that we see on the balance sheet or is that in addition to the $1 55. There's another 40 that's that is.
Essentially the customers' inventory and just happened to be held at your location.
So that that $40 million that we are holding of our customers' inventory are customer paid inventory is netted.
If we did not have that 40 million dollar reserves, let's call it or deposit against that inventory.
Our inventories would be approaching 200 million.
Right. Okay. That's helpful. I'm, sorry to distract you from the other long term asset question, Brett will shift to something different I'm not going to be able to get their bill [laughter].
Go ahead go ahead relative to Vietnam, I think you all have had said that youre looking for some good things from Vietnam.
What.
What insights can you share where is the business.
Coming from I think I have some ideas, where it might be the case, but Vietnam now open to where prospective customers can to come towards the family the factory and make final decisions, what's the what's the viewpoint there.
<unk> is now officially open for customers. The tour people are slowly talking about going we haven't seen anybody go yet.
We have interestingly.
A couple of customers, who want us to move product.
Super High volume product out of war as to Vietnam.
As well as new customers, who want to start in Vietnam.
No.
Almost 99% sure one of our customers will have us building the same product in Juarez and Vietnam.
It might be too early but at what point to do you all need to be thinking about expanding the Vietnam factory.
Oh, we're already thinking about that.
Face to do it.
And we're.
Basically teetering on the edge of that decision and it's all based on what the customer would like us to do.
And so it's essentially it's a rather simple process I. It sounds like if you have the space. It's just a matter of the time that it would take to it to make the expansion happen.
Yes.
Great and then I know in the past you all have talked about expedite charges too to get inventory or components.
Are you or your customers desperate enough that they are now paying for expedite charges and you are not absorbing those or how is that being.
Being incorporated in.
Well, that's a you can trace that over history, and it's kind of a.
Good insight into.
What's being faced today by <unk>.
All of us that are trying to build stuff.
Two years ago, two and a half years ago. When this started.
When we asked the customer for an expedite fee to.
By some parts on the gray market.
There would be a.
Almost two months gnashing of teeth in.
A lot of recriminations about they were sure key tronic had not ordered the part of the time because otherwise the part would be available.
And now that we've been through this so many times.
And we have.
It actually made changes to our system so it not only functions.
Appropriately to order parts in.
And time their delivery and also is more.
Transparent so if a customer does.
Become convinced that we did a bad job in getting the parts ordered by the time its much quicker for us to show them what are called waterfalls.
It goes through.
When we got there forecast.
When we placed the deals what the lead times, where when we place the Ceos.
Through how we got to where we need to get expedite fees in order to order parts.
So the only time key tronic would pay for an expedite fee is if we can prove that we ordered a parse appropriately.
And in the last two years, we have not paid for any expedite fees.
Okay.
So the.
The expenses that we continue to highlight or not in terms of expedite fees. There in terms of what happens in our factory.
When we have to shut down and everybody home for two weeks and then bring them all back retrain them again.
Cover from the people that go find another job due to new people hired to get them up and running.
And two the other issue is insulation is going so fast.
You can never go to a customer and say.
<unk>.
No, it's X plus 5% and we expect it's going to be another 5% in the next six months, even though Joe told US it was transitory.
We're going to charge you extra 10%. So we can get ahead of this you can never do that so you're always behind.
And raising your prices to your customers.
And that is part of this whole scenario and that we've been.
Appropriately successful in explaining to our customers why their prices have to go up.
But by the time, we get that months two months negotiation done.
<unk> has already gone up more.
So that's part of all of this too that we talk about the disruptions in supply chain. It's also the <unk>.
<unk> being driven by this disruption in supply chain.
So bill do you have an answer.
I've got an answer to your long related question.
Our ratio was more exciting.
But what that is is that is the capitalized portion of our.
Essentially a finance lease.
As a capital lease that's financed to help support some of the production equipment that we've bought recently.
Got it great. Thank you both and good luck.
Good luck, making it through this quarter.
Yep. Thanks Bill.
And it appears we have no further questions at this time I would like to turn the conference back to Craig gates for any additional or closing remarks.
Okay. Thank you again, everyone for participating in today's conference call, Brett and I look forward to speaking to you again next quarter.
And that does conclude today's conference. We thank you for your participation you may now disconnect.
[music].