Q1 2023 Key Tronic Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the first quarter of fiscal 2023 Key Tronic Corporation Conference call. At this time, we are getting additional participants and should be getting in a couple of minutes. We appreciate your patience and ask that you. Please remain online.
[music].
Good day, ladies and gentlemen, and welcome to the first quarter of fiscal 2023 Key Tronic Corporation Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Brett Larsen. Please go ahead.
Thank you good afternoon, everyone I am Brett Larsen Chief Financial Officer of key Tronic I.
I would like to thank everyone for joining us today for our Investor Conference call.
Joining me here in our Spokane Valley headquarters is Craig Gates, our President and Chief Executive Officer.
As always I would like to remind you that during the course of this call.
Might make projections or other forward looking statements regarding future events or the company's future financial performance.
As you 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-K quarterly 10, Qs and eight Ks.
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 October 1st 2022 for the first quarter of fiscal year 2023, We reported total revenue of $137 3 million.
Up 9% from the previous quarter and up 3% from $132 $8 million in the same period of fiscal year 2022.
During the first quarter of fiscal year 2023, we ramped up new programs from both long standing and new customers.
While constraints in the global supply chain continued to limit production. We saw some gradual improvements with respect to lead times for certain key components.
During the first quarter of fiscal year 2023, our results were impacted by storm damage to our facilities in Arkansas, which reduced revenue and gross profit.
We have received initial insurance proceeds to repair the plant and replace equipment, which should be completed by the second half of <unk>.
Fiscal year 2023.
And these initial coverage amount net of equipment book value loss.
Included in the reported gain on insurance claims during the quarter.
For the first quarter of fiscal year 2023.
Gross margin was seven 6% and.
Operating margin was two 4% compared to gross margin of seven 6%.
The operating margin of one 6% in the same period of fiscal year 2022.
The gross margin in the first quarter of fiscal year 2023 was adversely impacted by the storm damage to our Arkansas facility and increased labor cost in both the U S and Mexico.
While profitability is expected to improve in coming quarters with increasing your expected revenue.
Higher interest rates on our line of credit and increasing wages.
Limit a portion of that expected improvement.
For the first quarter of fiscal year 2023, net income was $1 $2 million.
11 cents per share up from <unk> eight.
$8 million or seven cents per share for the same period of fiscal year 2022.
Turning to the balance sheet, we continue to maintain a strong financial position despite the.
The continuing production delays due to supply chain problems and the continued rapid transfer of new programs. We ended the first quarter the total working capital.
$285 $8 million and a current ratio of 2.1 toward.
At the end of the first quarter of fiscal year 2023, our inventory increased by approximately $26 $2 million roughly 18% from the same period a year ago.
Reflecting our preparations for significant growth in coming quarters with much of the inventory increase being associated with the previously announced large outdoor power equipment program.
While the state of the worldwide supply chain still requires that we look at much further in the future than in historical periods. We continue to carefully balance custom customer demand and the likelihood of successful bringing in parts in time, but planned production.
In future quarters, we expect to see our net inventory turns slowly improves to more historical levels.
At the end of the first quarter of fiscal 2023 trade receivables were up about $12 $6 million from the same period a year ago.
Our DSO was also increased to about 91 days up from 83 days from the same period a year ago.
Which reflects timing of shipments to customers with extended terms and some delays in payments from customers, who have been impacted by pandemic related slowdowns and restarts in their respective markets.
Total capital expenditures were roughly $2.5 million for the first quarter of fiscal year 2023, and we expect total capex for the year to be around $9 million.
While we're keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production equipment, SMT equipment, and plastic molding capabilities utilizing leasing facilities as well to make efficiency improvements to prepare for growth and add capacity.
Yeah.
Despite the ongoing disruption from the global supply chain.
Continued to significantly limit production and adversely impact operating efficiencies.
We're expecting significant growth in fiscal year 2023.
For the second quarter of fiscal 2023, we expect to report revenue.
Proximately $140 million to $150 million and earnings of approximately <unk> 13 to 18 cents per diluted share.
We're working closely with our customers suppliers and employees to minimize the effects of delays attributable to the supply chain constraints.
Cost of labor and component costs freight logistics and limited availability of key components.
While our facilities in the U S Mexico, China and Vietnam are currently operating uncertainty remains the possibility of future temporary closures customer fluctuations in demand and can cause future supply chain disruptions and other potential factors could significantly impact operations.
In coming periods.
Summary, we continue to grow our pipeline of new sales prospects.
Continued to increase our customer demand to unprecedented levels for key tronic.
The overall financial health of the company appears strong and we believe that we are increasingly well positioned to win new EMS programs.
Grams and to continue to profitably expand our business over the longer term.
Is it for me Craig.
Okay. Thanks, Brett.
Facing continuing business challenges worldwide component shortages.
Aspartame bottlenecks and increasing labor costs, we're pleased with our growing revenue and earnings during the first quarter.
By the successful ramp of new programs and our expanding customer base.
During the first quarter of fiscal year, 2023 won new programs involving audio electric vehicles automation and power distribution equipment.
We're also preparing for a significant ramp in production in our Mexican facilities for the previously announced program with a leading outdoor power equipment company during the second quarter.
Once fully ramped this program alone could contribute approximately $80 million in AD revenue.
Global logistics problems were in Europe , and China U S. Geopolitical tensions continue to drive Oems to examine their traditional outsourcing strategies.
These customers are increasingly realize they have become overly dependent on their China based contract manufacturers for not only product, but also for design and logistics services.
As time has gone by the decision to onshore or nearshore production has become accepted as a smart long term strategy.
Rather than a knee jerk reaction.
As a result, we see opportunities for key tronic continued grills.
As we have discussed in previous prior calls.
We will keep trying to be the ideal solution for customers as they move to.
To respond to geopolitical pressures.
As you know our facilities in Mexico represented a campus of $1 1 billion square feet, whereas.
Most of which is contiguously located inside facilities acquired over time.
Our three U S based manufacturing sites have also benefited greatly from the macro forces driving business back to North America.
Moreover, our new Vietnam facility continues to increase production levels and the abatement of Covid related government restrictions in Vietnam is allowing us to travel there and tour of the play.
With potential customers for the first time.
Our Shanghai plant has added capabilities and management staff and systems that allow it to serve Chinese customers directly Shanghai has to replace the business that we moved to Vietnam.
Our procurement group in Shanghai, which serves the entire corporation is critical for managing the supply issues that crippled many of our competitors without boots on the ground in China.
The combination of our global footprint and our extensive design capabilities is proving to be extremely effective in capturing new business.
Many of our large and medium sized manufacturing program wins are predicated on key tronic deep and broad design services.
Once we have completed the design and wrapped it in the production or knowledge of a program specific design challenges makes that business extremely sticky.
We also invested in vertical integration and manufacturing process knowledge, including a wide range of plastic molding injection blow molding gas assist multi shot.
As well as PCB Assembly bottle Harvey painting and coating.
I'll flip side volume automated assembly and the design construction and operation of complicated test equipment.
This expertise sets key tronic apart from our competitors that are similar size.
As a result of customer looking to leave their contract manufacturers finally, one stop shopping he tried it.
Makes the transition to our facilities much less risky for them.
Tableau together a group of providers each limited to a portion of the value chain.
In recent years, the pedantic in supply shortages have been strictly both our top and bottom line performance and obscured the amplitude and velocity.
Is it growing wave of new business.
Nevertheless, the fact that we were achieving record revenue in the midst of continuing an unprecedented supply issues as an indicator of our growing momentum.
Moving further into fiscal 'twenty to 'twenty three the headwinds from the global supply chain continued to present uncertainty and multiple business challenges, but do show some signs of abating, particularly with respect to the recent price stabilization for some commodity components.
At the same time these price reductions are offset by increasing wages at our north American facilities.
We believe global logistic problems, China U S political tensions and heightened assurances supply concerns will continue to drive the favorable trend of contract manufacturing returning to North America.
As well as to our expanding Vietnam facilities, we see the potential for significant growth in fiscal 2023 and beyond.
This concludes the formal portion of our presentation, but I will now be pleased to answer your questions.
Thank you, ladies and gentlemen, if you'd like to ask a question you may do so by pressing star one on your telephone keypad.
Your phone please make sure your mute function is turned off.
Chart equipment.
Again star one for questions, we'll pause a moment to assemble the phone queue.
We'll take our first question from Bill.
I'm with tightened capital. Please go ahead.
Thank you, Oh, nice quarter and nice guidance.
So of the forecast.
Pardon me.
Oh go ahead, though I'm, sorry, I heard a thought I heard a noise coming through the line.
Of the four new customer wins that you announced what what is the size of each of those.
Oh, well your equipment is 15 automation closed 15 commercial electric vehicle charging is five distribution was five.
Great. Thank you.
And.
Do we.
I have this correct that if you hit the 40 million low end of your guidance range that that would be a record revenue quarter.
For you all is that right.
Yes.
Congratulations.
Let me shift if I may to the Arkansas flood could you walk us through what what happened I guess I didn't I haven't heard about any floods, but maybe that had been overtaken by hurricanes or or other big events that took place.
Sure.
Second financial questions.
You bet that was actually a lightning strike that occurred at our Fayetteville.
Facility that impacted some of our production quite a bit.
Yes.
And what was the revenue impact any earnings impact.
As you calculate it.
No.
Yeah.
Somewhere around two and a half million dollars of revenue, it's it's difficult to.
Certainly exact bottom line impact, but somewhere between 10 and 20% of that number.
And.
Then let me lets see here, if we do that massive 10% to 20% is a two and a half million that's going to be.
500 stepped up to 500000 so the.
So the plant damage was actually greater than the than the actual financial impact and then here in the first quarter.
Yeah, the gain is actually associated with the equipment replacement.
No.
That has an impact on the gross profit is as we as we discussed.
We're still analyzing and working with the insurance carrier.
Business interruption, but we have no value at this point.
So you do have business interruption insurance, it's just that the negotiation processes underway.
Correct.
That's helpful.
After you Brett.
Yes that can take some time bill.
Right.
So when we look at the kind of stepping back away from the.
Arkansas flood the gross margin.
Klein sequentially.
From nine 3%.
And in some of that impact is a is the Arkansas, Florida as you.
Pointed out but then there is another component that's that's would not be in there what what besides the Arkansas plant and pulled the gross margin down sequentially.
Couple of things one we have increased wages that are that we've discussed.
During the quarter. The other is some inefficiencies associated with them.
Essentially starting up new production for new programs.
We're definitely in the ramp phase.
Those programs.
And that of course has a detriment to your to your overall gross profit until you can stabilize those.
And how long do you do you anticipate it will be before those are.
Our stabilized.
I think.
Throughout fiscal 2023, we're going to be introducing new programs.
You know I think a large part of the decrease in gross profit this quarter was related to getting ready for the large $80 million program that starts this quarter.
So I don't know if we're ever stabilized that was probably the world.
We hope never to be saying, yes, we always have.
We want to be ramping new programs.
And where are you ramping new programs last quarter.
Yep.
Okay. So, we're I'm, where I'm going with all this and.
Maybe I'm a over mapping this this situation, but if I look at the sequential change in gross margin assuming that you you can go back to nine 3% and still be ramping up.
Ramping new production.
That and you had the the Arkansas plant impact.
But if we were to add back in the insurance proceeds when they ultimately theres roughly a 10 cent of Tencent a sequential impact so that.
That what 11 set number that you reported this quarter would otherwise be somewhere closer to eight a 2021 set number and I'm, just assuming a 25% tax rate on my incremental dollars here.
The thing that I'm, maybe directionally missing am I may be off by a few pennies, but directionally missing with thinking about this.
Yes, I think we mentioned in our fourth quarter press.
Press release and earnings call that the gross margin was higher than historically.
Higher than historical.
Numbers in that that it would more than likely dropped down to more historical levels.
Some of that is mix some of that is.
Price increases to our.
To capture some of the increased cost that were incurred earlier on.
Last year through the first three quarters.
So I think that nine 3% gross margin.
Higher than what I would expect.
Going forward.
Okay that is helpful. And then kind of backing off of the actual math just qualitatively would you concur with the idea that that as you improve efficiencies and as your revenue grows that there is an opportunity for for that gross margin too.
Expand from this quarter's level and therefore, there there is an opportunity to see some not.
Faster earnings growth.
As a result of the revenue growth.
Absolutely completely concur with that okay great.
Both in and again nice a nice quarter and it sounds like are beginning to work.
A good trend thank you.
Thank you.
We'll take our next question from Sheldon Grodsky Grodsky Associates. Please go ahead.
Hello, everybody.
Yeah.
Well one of the things I didn't hear you mention and going over the quarters results.
The SEC investigation.
So was there no costs associated with that.
He says he said, okay, we're done or is it just.
The lower level of activity.
Or something else.
All right.
It was a lower level of activity.
Yeah.
The lower level like what you did in the past few quarters.
Yeah.
Any idea, whether it's going to stay that way.
I have no comment on the S E C.
[laughter], Okay, I'll, let someone else ask a question.
And as a reminder, star one for questions.
We will take our next question from George Melas with M. K H management. Please go ahead.
Thank you hi, good afternoon guys.
Follow up to that question what was the cost associated with ESG.
Florida.
It was roughly a couple hundred thousand dollars for the whole quarter.
Okay great.
Okay.
And Brett do you have a slightly better crystal ball there.
Greg on the FTC investigation.
I I won't follow my leader I have no comment.
If you look back you argued.
If you look back in France grapes for last year in the quarter.
My comment has been no carbon.
And to be no comment.
We try to see if we can get okay.
And that's a question for Brad the SG&A this quarter.
We're sort of back where it used to be.
And of course had withheld partly by.
Hello.
Destination called.
Even if you normalize for that.
No I guess, it's about it's about the normal legal audit.
We shouldn't expect to the rest of the year.
Yes.
So essentially yes.
I missed it.
<unk>.
Good morning.
SG&A.
Okay.
Yeah, I would expect operating expenses to maintain somewhere near the 6% range yes.
Okay.
That of course that includes the.
That includes engineering.
Right, Yes, correct correct.
And even as you ramp up.
Revenue.
And programs.
Can still maintain at that level.
Yes.
Chip revenue.
Yeah.
Yes.
Okay.
Yeah.
In terms of inventory.
And after that.
Remember you had a fair amount of inventory that was anywhere handle it says otherwise.
That was overwhelmed by the customer.
What is the what is the situation there is that still at similar levels or maybe coming down.
Actually the inventory that is in their warehouses that is owned by customers that amount has grown.
Okay.
And we will continue to do so as inventory that we bought.
With a new agreement with our customer that we if we were to own that for 60 days 90 days 120 days, depending on what we negotiated.
That inventory with age out and our customer would be forced to pay us inventory.
It was a tit for tat agreement, because our customers want product and wanted us to take a chance that we would get that last component that we're having trouble finding.
And so that's why they agreed to these arrangements so as time goes by.
And kind of.
I'd say, we're getting close to an inflection point on that.
As more and more of this inventory that we bought on the come so to speak.
There is eventually covered by the customer.
Does out and we are paid for it.
So.
I don't know that trying to predict the trend of your questioning but.
We have more in our warehouse that's already been paid for is actually a good thing rather than a bad thing.
It does it help because it's small.
It just helps you with production.
Right. So we were able to go.
B cure and secure.
So that may have otherwise snapped up by somebody else, while we were looking for the one part we couldnt find it eventually our customer funded.
All of that in case, we were not successful in finding that last part.
Very good okay.
And remind us that the.
The major orders.
New program.
Power equipment.
Did that come from China would be made.
Direct manufacturing.
In house.
Hello.
Yes, Julian that and would you expect to be true.
Be well.
So that program, we expect to be ramping in.
In a couple of weeks.
It came from a company who is in the power equipment business is entering a new segment.
Are they have they have their distribution channel with orders.
Already in place.
So.
This isn't a speculative number that we're giving out as long as.
And then it goes as per plan.
So this is not an example of something that came back out of China or out of Asia or somewhere else.
However is an example of.
A.
An OEM that was asked by the end customer to enter the business because the product.
Currently available was not.
Up to their standards.
Okay.
But is that a new customer for you guys.
Okay.
Yes, that's a new customer for us yeah.
Okay.
But we've been.
As we've talked about in the past we've got a bunch of engineers, including me you now know how to design.
A piece of power equipment that we hadn't knowing anything about a year ago, which will lead to more opportunities as everything else. We've designed is done.
So it's a it's been fun and a lot of our stuff is small sitting on a bench with oscilloscope. So good in this stuff has been.
Outside making.
Making lots of noise and banging into stuff and breaking things. So it's been a bit of fun change.
Okay.
The engineering side.
Right.
Yeah, otherwise I'm going to say.
Okay.
Yes.
Oh.
And.
Going back to.
What doesn't.
Well I have a question at the beginning.
In terms of the gross margin and the ramp of programs.
This particular program.
Okay.
Your gross margin in the September quarter.
Do you expect this quarter to be the bottom for the year in.
In terms of gross margin.
Yes.
To that.
I'd say, probably there's a lot of moving parts to gross margin as you know.
And.
Our business is not steady state because we're adding so many new customers and.
Different facilities are growing so rapidly.
So when you're when you're trying to ramp and 80 billion dollar program at the same time, we're growing the domestic sites from 100 to a 122, probably 180 billion plus.
At the same time, we've got.
Biden inflation going on with 10%, so who the hell knows whats actually going to happen.
You read through all of that into the calculator to try and come up with the number but in general.
More volume more revenue.
Louise turns out good for us.
Okay.
Very good thank you.
Yep.
We'll take our next question from Bill <unk> with Titan Capital. Please go ahead.
Thank you I want to circle back to your comment Greg that are this power.
Equipment company will be $80 million.
Annually and if we think about that does this for linear quarters, which may or may not be correct.
That that you.
We're not even close to providing a guidance of 20 million a.
Sequential increase at least at the midpoint is there something.
Something else going on here is that we're not taking into account or is it just early enough in the ramp since she said, it's not going to start ramping until a couple of weeks from now.
As I said stuff was still going wrong and busting. So.
We're being cautious about predicting when this hit full speed.
Do they have mentioned that they are I'm sorry, Greg go ahead.
Actually about a week ago quit going around in circles on breaking so.
Okay.
I think the numbers, we projected this quarter pretty safe.
Hope.
What day in Norway.
Are the same as they would be if we hadn't started on October one full speed.
Okay.
And is this a product that has some seasonal.
Deadline or anything of that nature or is it more of a of.
The consistent year round nature.
In the spirit of where I'm going with this question is.
Yes, if there is some seasonal deadline or you're tight on that and therefore, we could see a really big jump from this quarter. The Q2 two at the March quarter in Q3, as they try to catch up or you try to catch up.
That's a nice try but will it get you forget that more than a quarter in our bedroom camouflage the most but I caught it and the answer is no comment.
Well. Thank you for at least technology in that it was a nice try I appreciate that.
[laughter].
[laughter] shifting them.
If I may to inventories there was a discussion earlier about inventories and you did have the inventories up about $13 million sequentially would you discuss kind of what are what's happening behind the scenes with that really relative to the conversation you were having before about buying buying for some customers.
Advance all I'll say at risk, but with a limited time period until the customer buys a piece of the product.
Well the majority of that increase was due to the delay of about a month in a quarter bump in two weeks more than a week.
Of the park with the deal so.
So that inventory is coming into or.
Just about to start building and shipping that so that was the bulk.
And inventory levels.
There was about I don't know $3 million or so above the line.
Best excites inventory due to the fact as I said before Theyre wrong really significantly from 120 to 170 180 or 90.
And overall inventory for the rest of the property was flat or a little bit ball, which is based.
Basic or warm winter based compared to.
How many billions of dollars we missed it building that we were hoping to build because apart and show up on time.
Okay.
Right. Okay. That's that's helpful.
I'm going to come back to my thinly veiled.
Question about the future.
And I mean, it's actually in all seriousness tried to make it answerable is there.
Without you answering that and giving me an opportunity just to think it through.
It. It does this product tend to have seasonality to it and if so kind of what what is it season.
Yeah.
Okay.
I'm not commenting on that anymore, because we are still under real information locked down with the customer.
Okay.
Thank you and again really a nice quarter and guidance.
Thank you.
Bill.
Dart one for questions well go next to Sheldon Grodsky with Grodsky Associates. Please go ahead.
Could you describe how the world.
No problem no cap on the FCC Sheldon.
Could you describe.
What kinds of transportation bottlenecks.
Suffering from.
Yeah, there's still even though the prices are coming down for airfreight.
Both shipments containers are theirs.
Still a problem with trains here in the states pretty bad problem, there's still problems with getting the trucking scheduled.
So it's quite a bit better than it was but it's still not the way it needs to be.
Okay. Thank you.
But.
We'll take our next question.
From George Melas with M. K H management. Please go ahead.
Thank you.
Trying to understand a little bit sort of customer mix and customer concentration.
Let me pick up my comments here.
I look at the last year, if I look at UK your top customer had grown very fast.
Previous couple of years, and then there was a very meaningful.
Thank you.
Probably they had some COVID-19 related revenue.
Don.
The rest of the business.
Relatively fast.
Okay.
Those kinds of.
Okay.
It changes.
Does that create disruption in the operation and it will be inventory.
And then the question is how do you manage that because over the last few years.
Extreme it.
Well the shift.
The shift in customer workload.
It doesn't really give us difficulties as long as we have.
Reasonable time, let's call it.
A quarter of a year.
Or more to react.
One quarter you said.
Yep, so there have been.
Well, let's see.
There was one customer who.
We are still arguing with over how much money they.
Olson inventory.
As the inventory Burns off.
The arguments are getting less heated.
But that customer.
Customer forecasts.
Slide two third.
Inside of a quarter.
Although.
That was a that was a customer that was running about.
$6 million a quarter.
So the answer to your overall question is.
All of our inventory issues, not all but 99% of our inventory issues have been caused by.
Unpredictable deliveries of components from our suppliers to us.
And a very very small percentage of the issues are caused by.
Customers suddenly dropping their forecasts and us being stuck with a bunch of parts coming in that we.
We have to hold on to you before they have to pay US 60 days 90 days 120 days later.
The cost of the factory.
I wish you could go tour the factory because it's a it's a point of pride amongst all of us, but all of our factories are.
Almost breathtaking as you walked through there and see the mix of products that are being built.
And understand the flexibility.
In each of those facilities as we can move people and process is up down around backwards and sideways.
To match up with demand.
It's hard to get your mind around 4000 people in a million one square feet.
Making so many different products from you.
Really if you think of something Thats worth 99 cents up to something that's worth 5000 Bucks.
Right.
Okay.
So that's pretty clear sorry, the way the real issue with the inventories the volatility of supply that comes down.
Your life should.
Become a little easier.
Yeah.
The thing that's kind of annoying about that is most of the MRP systems, including ours.
Were never designed to deal effectively with.
These kinds of surprises of you get to know one day that says it yeah. Those 10000 parts that were supposed to ship yesterday, we didn't ship them and we're not going to ship them for a year.
So as we poured a lot of time.
Sweat blood and tears into modifying systems and processes, so that end and actually.
Uh huh.
Policy dealing with our customers.
All of this work we've done to modify this so that we can.
Driving inventory down even with a burst of supply chain I would say in about five months as a recession hits, it's going to go.
It's not going to be needed anymore, we'd be back to the normal stuff.
But it's it's made our systems quite a bit more.
Robust.
And quite a bit more.
Air roof. So you know you'll.
It will all be good indeed.
[laughter].
Okay.
Okay very good thank you.
[laughter].
So our one for questions, we'll pause a moment.
Yes.
It appears we have no further questions at this time I would like to turn the conference back to your presenters for any additional or closing remarks.
Okay. Thank everyone for participating ill talk to you next quarter.
Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.
Okay.
Okay.
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