Q2 2023 Key Tronic Corp Earnings Call
Yeah.
Good day and welcome to the second quarter fiscal 2023 Key Tronic Corporation Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Brett.
Please go ahead.
Thank you good afternoon, everyone, saying, Brent Larson Chief financial Officer of key Tronic.
We'd like to thank everyone for joining us today for our Investor Conference call joining.
Joining me here and there our Spokane Valley headquarters is Craig gates our.
President and Chief Executive Officer.
As always I would like to remind you that during this course 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-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 we released our results for the quarter ended December 31 2022.
For the second quarter of fiscal 2023, we reported total revenue of $123 $7 million compared to $134 5 million in the same period of fiscal 2022.
For the first six months of fiscal 2023, our total revenue was $261 million compared to $267 2 million in the same period of fiscal 2022.
As previous previously announced our revenue for the second quarter of fiscal 2023 was impacted by a six week delay in starting production for a large program with a leading power equipment company. This.
This delayed revenue by approximately $20 million from the second quarter of fiscal 2023, but production for this program is currently underway and increasing in the third quarter.
While constraints in the global supply chain continued to limit production, we saw some gradual improvements with respect to lead times.
Certain key components.
For the second quarter of fiscal 2023, our gross margin was seven 2% and operating margin was two 9% compared to a gross margin of seven 3% and an operating margin of one 2% in the same period of fiscal 2022.
The gross margin in the second quarter of fiscal 2023 was adversely impacted by business interruption and other operational losses related to storm damage in our Arkansas facility.
As well as by preparations for expected sales growth in the second quarter and increased labor costs in both the U S and Mexico.
While profitability is expected to improve in coming quarters with expected increases in revenue.
Your interest rate on our line of credit and increasing wages will limit a portion of that expected improvement.
For the second quarter of fiscal 2023, net income was $1 million were nine cents per share compared to <unk> six.
$6 million or five cents per share for the same period of fiscal 2022.
Our results for the second quarter of fiscal 2023 included a gain on insurance proceeds of $2 $7 million or approximately 19 <unk> per share related to equipment damage damaged in the storm at our Arkansas facility.
We are still determining determining further business interruption proceeds related to the operational losses incurred in the past two quarters as a result of the storm damage.
For the first six months of fiscal 2023, net income was $2 $1 million or <unk> 20 per share compared to $1 4 million or 13 cents per share for the same period of fiscal 2022.
Turning to the balance sheet. Despite the continuing production delays due to supply chain problems and the continued ramp and transfer of new programs. We ended the second quarter with total working capital of 190, <unk> hundred $97 million and at current rates.
<unk> two point once towards.
Compared to the prior quarter were encouraged to see our receivables decreased by $4 $7 million and Dsos at 78 days down from 91 days, which we believe reflects some improvement among our customers with respect to disruptions from COVID-19 and <unk>.
Supply chain issues.
At the end of the second quarter of fiscal 2023, our inventory increased by approximately $2.5 million or by one 5% from the prior period period.
Reflecting the delayed production for the large outdoor power equipment program and our preparations for expected growth in coming quarters well.
While the state of the worldwide supply chain still requires that we look out much further in the future than in historical periods, we attempt to carefully balance ballots customer demand and the likelihood of successfully bringing in parts in time for planned production.
In future quarters, we expect to see our net inventory turns slowly improve to more historical levels.
Total capital expenditures were $1 $4 million for the second quarter of fiscal 2023, and we expect total capex for the year to be around $9 million.
We're also utilizing the $2 $7 million gain on insurance proceeds for storm damage to modernize our operations, which should increase efficiencies in our Arkansas facility.
Well, while we are keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production equipment.
Key equipment and plastic molding capabilities utilizing leasing facilities as well as make efficiency improvements to prepare for growth and add capacity.
Despite the ongoing disruptions from the global supply chain that will continue to limit production and adversely impact operating efficiencies, we are expecting significant growth in fiscal 2023 for.
For the third quarter of fiscal 2023, we expect to report revenue in the range of a $160 million to $170 million in earnings in the range of 15 to 25 cents per diluted share.
While profitability is expected to improve in coming quarters with increasing expected revenue.
Higher interest rates on our line of credit and increasing wages will limit a portion of that expected improvement.
While our facilities in the U S Mexico, China and Vietnam are currently operating uncertainty does still remain as to the possibility of future temporary closures.
Customer fluctuations in demand cost future supply chain disruptions and other potential factors any of which 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.
We believe that we are increasingly well positioned to win new EMS programs and continue to profitably expand our business over the longer term.
That's it for me Craig.
Okay. Thanks, Brett.
We're pleased with the successful ramp of new programs and our expanding customer base in the second quarter of fiscal 2023.
Despite six week delay for production from the large previously announced power equipment progress.
Production for that program is now back on track and rapidly ramping up in essence, the revenue from that program simply pushed by a quarter.
During the second quarter of fiscal year 2023, we continued to see the favorable trend of contract manufacturing returning to North America.
Currently awarded New business has created backlog will support over 65% growth in the U S sites over the next fiscal year.
We won new programs involving outdoor power equipment battery management automated sprinklers and biometric sensor technology.
We move into the third quarter with record backlog and we're seeing improvement in the global supply issues for certain components that are severely limited our production in recent periods.
Global logistics problems the war in Europe .
China and U S. Geopolitical tension has continued to drive Oems to examine their traditional outsourcing strategies.
We believe these customers increasingly realize.
They had become overly dependent on their China based contract manufacturers not only for product, but also for design and logistics services.
Over time, the decision to onshore or nearshore production is.
He is becoming more widely accepted as a smart long term strategy.
As a result, we see opportunities for continued growth.
As we've discussed in prior calls we built key tronic to offer the ideal solution for customers as they move to respond to geopolitical pressures.
Our facilities in Mexico represent a campus of one 1 million square feet and whereas most of which is contiguously located in nine facilities acquired overtime.
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 towards the play with potential customers.
Our Shanghai plant.
Capabilities and management staff and systems.
That allowed to serve Chinese customers directly Shanghai is to replace the business that we moved to Vietnam.
Our procurement group in Shanghai, which serves the entire corporation.
Is important 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 size manufacturing program wins.
<unk> key tronic deep and broad design services.
And once we have completed the design and ramped into production.
We believe our 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 gasses multi shot as well as PCB Assembly.
Metal, forming painting and coating complex high volume automated assembly.
The design construction and operation of complicated test equipment.
This expertise may set us apart from our competitors have a similar size as a result, a customer looking to leave their contract manufacturer will find one stop shopping and key tronic.
Which is expected to make the transition to our facilities much less risky and cobbling together a group of providers each limited to a portion of the value change.
Moving further in fiscal 2023 headwinds from a global supply chain continued to present uncertainty and multiple business challenges, but do show some signs of gradually 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 logistics problems, China U S political tensions and heightened assurance of supply concerns will continue to drive the favorable trend of contract manufacturing returning to North America as well as to our expanding Vietnam facilities.
The fact that we see your record level backlogs and expect record revenue in the third quarter.
Indicates our growing momentum.
Along with our records, we are setting for backlog and revenue.
We see a dramatic improvement in all metrics associated with business development.
For example over the past year, the number of active quotes with prospective customers as increased eightfold.
This unprecedented increase in demand for our unique mix of skills location and people as powerful implications beyond the obvious revenue growth potential.
In particular, we've been able to negotiate more favorable pricing terms and business parameters than in the past.
As well as to be much more selective in the new customers we bring on.
While this shift in leverage will not manifest in the short term its effect on our long term performance should be profiling.
As the implacable effects Oh.
Global demographics combined with the unique attributes of the North American economy to drive the Reindustrialization of the U S.
And the accelerating industrialization of Mexico.
Key tronic should be uniquely positioned for significant growth in fiscal 2023 and beyond.
This concludes the formal portion of our presentation, Brett and I will now be pleased to answer your questions.
Okay.
Thank you.
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Okay.
Okay.
Our first question comes from Bill <unk> with <unk>.
Heightened.
Please go ahead.
Thank you Oh, let's start if we could with the power equipment.
Customer that.
That had the delays since that led to the pre announcement walk us through if you would what happened there and and.
What if anything that key tronic could've done too to influence those revenues coming in sooner.
Okay.
Well Bill I'm not sure I can be as specific as you would like about what happened there I can.
And generally say that it was a brand new program.
On a brand new product.
That we shared in the joint design and development thereof.
There were delays.
All across the board.
In fact, the final delay was the artwork for the packaging.
So.
We were six weeks off out of a.
11 months design program.
Which was.
It was pretty annoying, but on the other hand.
We got it done.
And in fact, we mentioned the new programs involving outdoor power equipment.
<unk> customer has just awarded us a another piece of business on another product.
And before you ask me, it's about $11 million.
That's that's quite helpful and congratulations on that next.
Our next piece of business.
Yep.
Continuing.
Continuing with them.
So since I've never been in a in a position of doing artwork for packaging.
Six week delay sounds like a lot, but walk us through kind.
How does that.
You bet.
It seems that just seems extreme.
To me.
It is actually.
More common than you would hope in our business.
While we are manufacturing a product for a customer that is selling it to the retail.
<unk>.
So retail packaging as you know is very very critical for say.
Sales and.
Product market acceptance.
And unfortunately, we're probably fortunately, knowing how artistic I and the rest of my engineers are we have no say in the artwork and.
It's a joint agreement that has to happen between our customer and our customers' customer.
Joining agreement that has to happen between.
Quite a few artistic people.
So it's fairly common that where with our backs against the wall trying to get either packaging or artwork for packaging.
And approved it actually produced.
And in fact, we're looking at a big upside right now for a different product.
And yet again.
<unk> is our ability to get packaging in time with the customers increased demand into a new market.
Fascinating, thank you and so with this power equipment customer.
Just to help us have a perspective up the trend line, that's taking place.
What was the revenue level in October than the month of November the month of December and then in January .
What does that look like.
Pretty easy Bill Zero zero zero.
And then at least one anymore.
Yes.
And at least one more month of January go ahead.
Yeah, I'm not going to comment on what it was in January but it was a lot more than zero.
And are you able to talk about what the peak level of of our production will be for this customer.
No.
And.
Is January is probably not at the full run rate given our given that they were zero in December so that'll be even higher in coming months.
Yeah right now we're at a.
We're at about five eighths of our required run rate after.
About three weeks of full production.
Okay.
That's helpful and then Hum.
Originally if if I have the right customer in mind I think you had a press release that stated that you anticipated that they would be an annual run rate of about $80 million.
Is that still.
Is that still what this piece of business is looking like I'm, excluding the new piece of business that you won but just that's our original pizza business.
This original piece of business, we expect to.
B.
Somewhat less than that in this first period as far as an annualized run rate.
But at the beginning towards the middle of next fiscal year, it should be up to that number for a run rate.
Okay. That's that's quite helpful. Thank you.
And then you did allude to the fact that I ask about the new product wins or and aside would you.
Would you talk through the other three in terms of the size and then whatever discussion that you have on the DS four wins would be helpful.
The other three were around five each.
Those will be hit those would be hitting into the Midwestern.
Facilities.
And those are those are pretty well.
That's right where those are pretty representative.
Of what are the Midwestern the three sites in the Midwest have been winning at a really amazing right over the last year, when we said that they're going to they're going to be over 65% growth.
That's pretty astounding since they had been basically.
Stable for the last.
Four and a half years five years.
As I always told you we expected everything that's happening to happen.
It was a little bit delayed, but now it's actually happening.
Larger extent than we thought it was going to.
Well they the folks in the Midwest are.
Uniquely constituted to run programs in the Wanda.
$10 million range.
Ed.
This size programs just continue to come in over the transom and Gaston hooked and cleaned.
And it's just an amazing right to me, it's been really really fun.
And presumably even though it's a.
Be more exciting for us externally to talk about our large customer presumably the smaller ones.
The I'll call them bread and butter ones are higher margin than our than a large piece of business.
Yeah, you can.
Pretty reliably predicts that something that's going to be run in the U S facilities is lower volume higher margin.
Stickier.
Overall.
And typically typically quicker to develop also.
Unless theres a design program that went with it.
Yes.
Okay. Thank you.
And I don't want to take up more than a more time than than I should here, but I would like you to talk through this the change that's taken place with the U S facilities or the Midwest facilities going from essentially flat for a number of years to this accelerated.
Growth.
What happened what changed to what to lead to this.
Well.
As we said in the narrative as more and more of the general agreed the opinion is that.
It's risky to be overseas.
And the size of the company that will cut band.
The attention that you need to be successful with that piece of outsourced business.
Continues to grow.
More and more of the smaller pieces of business that just automatically went to Asia.
Arnaud.
More automatically stay in the U S.
Has asian prices have gone up as uncertainty with Asian supply has increased.
And as the.
The friction business friction of doing business overseas has become more generally acknowledged.
It's just it's just so much different than it was five years ago. In every piece of business. We won we had to dig out from under a rock.
Business is now coming to us.
And people are just kicking tires.
Or have been given edicts by there.
Corporate leaders and business leaders to.
Good stuff out of Asia, because it's too risky.
Thank you and we did we hear correctly that your quotes you said were up eight fold from one year ago.
Yeah.
Yes.
Uh huh.
We.
As you know we've been doing this for a while now and we used to have.
Probably five six years ago, we'd sit around and agonize over four or five big quotes that we had to lay in one of them in order to.
Replace leaks out of the revenue bucket and maybe grow.
Yeah.
Now we've got four pages of single line quote opportunities that are.
All of them that's past.
Our screening process all of them are.
Real opportunities and it's just.
It's hard to even fathom edges for somebody like me that's been through.
While we were going through four or five years ago, but it's really fun.
Alright, Thank you very much I'll give someone else an opportunity.
Okay.
Our next question comes from Sheldon Grodsky Grodsky Associates. Please go ahead.
Hello, Good afternoon, everyone.
First question I'm going to ask.
The Arkansas facility is it fully up and running or is it still.
Repaired or what's the status.
It's probably 90% up and running and that's a bit more.
Down to the weather than it is anything else. We just had the last machine arrive.
Today in a snow storm in everybody's hold but the general manager and a BP or not they're driving forklift trucks are getting it off of the trailer.
Okay.
Okay.
Put on.
Yeah.
But yeah it's.
At like I say, it's 90% and they had a good couple of weeks.
The last two weeks and so we'd expect that to continue to ramp.
Okay, and as far as the insurance situation than maybe more.
Money coming in from that.
If things get determined or.
Do you expect it to be neutral from here.
No I think theres going to be some more coming in our insurance policy was well written and the company has been very.
Forthright and honorable which has been a.
The World we live in today it was a very pleasant surprise they've been good puzzle.
Yeah.
So anyway.
Yes go ahead I'm sorry.
So the cool thing about that is that.
The equipment that we have replaced.
Was aged but the policy was for replacement.
And as we said in the narrative just to put some flesh on those bonds.
This stuff we've got in there now is five times as fast.
And so that has a very massive impact on capacity and cost out and then Arkansas facility.
Okay.
No I don't know how to phrase this question.
But.
Based on what you're saying.
You're seeing probably at least in the short or medium term more demand than you can actually meet.
And in a relatively short period of time.
We're looking forward to.
Major growth cycle for key tronic as far as you can tell.
Just from a.
A macro sense.
What's happening in the world.
And as I've gone through the various metrics.
We analyze and I think are relevant.
It certainly seems as if we should be looking at.
Very nice growth rate for us going forward.
Well.
I've been following your company for a long time and the.
It always seems that something gets in the way of getting to the bottom line is I keep on hoping every quarter that we're finally going to break out of that and then I guess, some real sense of what potential you can do here. So I wish you. Good luck on that the world hasn't been an easy place to operate so let's hope it gets a little bit easier for you.
You were able to pick the right contracts et cetera, I'll, let someone else take over.
Question.
Okay. Thank you. Thank you.
Yeah.
Our next question comes from George Melas with MK.
Please go ahead.
Thank you Hi, Greg Hi, Brad.
Hey, George.
Yeah.
So I wanted to follow up on the two previous quarters.
And sort of when the sort of local.
Into the future.
And I think you were saying that quoting is strong.
The impact on pricing.
This is Barry you can choose your customers better.
And then I guess, you have to make some kind of balance between growth and margins.
<unk>.
And I'm wondering how you think about that I'm, just I'm always thinking about the margins and where could margins go.
And.
And is there sort of an idea that maybe the idea would be to grow X percent in order to reach 9% margins or 99, 5% margin.
Can you can you sort of elaborate on that I don't know.
I don't know if it makes sense, but maybe I'd love to have a discussion on that.
Well.
What I was trying to say I'll, just try to do a better job of explaining is that.
Five six years ago actually from the time, we became a contract manufacturer until about a year ago.
We were.
Ahead of our time in predicting that.
What's happening now is going to happen.
So.
Very much so at the beginning of our contract manufacturing days and it has lessened over time.
And then the.
Okay.
No commentary on the goodness or badness Trump, but certainly the Trump presidency.
Sped up the realization of what we already knew was going to happen and then COVID-19 accelerated it even further.
Well that the difference between now and the old days, let's call. It before the pre realization that overseas is risky.
So the difference now is that.
We would be sitting in a room.
During the final negotiations with the customer and the customer say well, we're close to a deal but.
You know you need to drop your margin by a half point because your higher than these other guys.
And we would be sitting there sweating bullets trying not to show. The fact that we desperately needed that deal to happen.
And so we would act as soon as we could act.
They haven't seen through us or not see through us depending on how perceptive they were and how good we were acting on that day.
And we only get driven down to where our margins were to the point, where it was basically at this point, we don't care anymore.
If we lose this business, even though we really want it we're going to have to walk away.
And today.
The situation is quite a bit different when.
Our prospective customers starts down the road of you know and this is just like buying a used car, it's a very predictable and prescribed.
The interchange between buyer and seller.
But when they start down the road of.
You are too high or we need you to hold inventory for a year or we need payable terms of 360 days and then maybe we'll pay you.
We can just say, yes, no. Thanks, we're not interested and walk away.
And.
It's hard for me to tell you George.
What that's going to do.
<unk> gross margin, but I can for sure tell you, it's going to make it better.
And we don't have any we don't have any.
Hard and fast rule that says well anything under 9% were walking because as we were analyzing a piece of business. There is not only the margin. There is also the.
Potential for growth there is the behavioral patterns that we see exhibited by the customer as we go through quoting and negotiating.
There is the attractiveness of the business from an operational standpoint, so there's a gob of factors that we're considering as we're negotiating.
But we're negotiating from a position of strength rather than a position of.
Semi desperation that we have to win this deal.
So I know that you would like a nice number that you can plug into your equation and so.
But I can't give you that I can just tell you, it's going to get better or at least I believe it's going to get better.
Okay and then.
That is it really driven by a design capability and too.
Sort of that you sort of becoming a one stop shop.
Sure.
Really being able to farm out.
But the whole box a whole product right.
It's interesting because you're talking about.
I think some delay in the artwork baggage and because it means that you're going to put your products in that packaging and then it goes directly to the retailer. So it's just good news.
Yeah. So those are two of the key capabilities that you have in Q.
The advantage is that you have in the marketplace.
Yeah.
Yeah and to give you an example.
One of our pieces of business new pieces of business is probably.
Perfect.
Embodiment of the overall macroeconomic process that we're watching and that we predicted.
And that we're enjoying.
So probably I'm going to just give you. This for example, and I apologize this is going to take our time in it but I can do it in less than two minutes.
Okay.
30 years ago.
A guy invented a new product that required a pretty complex manufacturing process.
All kinds of wellbeing and vacuum forming and hydro forming.
And 20 years ago that product moved to a town in China and a number of his competitors also copied him and then move their product to a town in China.
So that town and China became the world's preeminent location of manufacturing that type of product.
And then as time went by in the last two or three years.
That company and their competitors realized that in order to really service the market here they needed to have a lot less than <unk>.
12 weeks uncertain ship time over the ocean.
And the slight increase in price was more than offset by the increase in business and margin they could make by having a much quicker turn.
And so they chose us to bring that manufacturing back to Mexico. So it left the west coast of the states went through a town in China.
And now let's come back to our factory in Mexico.
So we are in fact reverse engineering, the Chinese and reverse engineered the guy in Seattle.
And I just find that to be an amazingly big circle of whatever you want to call. It that's going on right now, but that is that is exactly what's going on at many different industries.
In some cases, our customers have lost the knowledge and ability to manufacture.
In other cases, they've lost not only that they lost the ability to design and manufacture.
So as we've talked about the reindustrialization of the U S and the industrialization of Mexico.
That's a perfect example, and that was a minute or two minutes and 10 seconds overshot it.
Yes.
I think nobody whiskey, Jack Greg, but it's great.
Okay.
Okay.
Let me push you a little bit more on margin.
While the margin goal that you would like.
Let's say fiscal 'twenty four.
What is it from a gross margin perspective, because they fluctuated as I think we will always try to got one four at nine or slightly above nine, but we falling short.
What what what what would what would be your goal.
I don't know George I keep telling you I'm not going to give you a number for your equation because I can't I hope, it's I hope it's better than that.
From what.
If I look forward from what I'm seeing if nothing goes wrong.
It shouldn't be better than that but something always goes wrong.
Okay, and then from a growth perspective, how much growth is too magical hour, how much growth would be very difficult to manage.
8% growth sort of a good number I mean, 20% of the lung.
Well.
If you take the <unk>.
Midwestern sites as an entity.
They used to be.
They are going to manage.
65% plus growth in the next half a year.
Yeah.
I don't see that there's going to be any significant.
Problems within.
The operations.
Doing that there may be problems with getting parts.
But in terms of managing it I don't see an issue.
Okay. There are no you know every every piece of business is different.
Some of it is highly <unk>.
IQ point intensive to bring in.
Some of it is just a simple slam dunk moving in PCB Assembly from our competitor to us.
So all those factors go into my answer of I.
I don't know, but.
Certainly.
A lot more than what we've done in the past as possible.
Okay.
Great. Okay. Thanks for those very precise.
Guidelines.
Yeah Yeah.
Seven six so at this point that it will be good.
Exactly thank you very much.
Okay. Thanks George.
Okay.
Our next question comes from Bill <unk> with Titan Capital. Please go ahead.
Thank you so you had.
<unk> mentioned that the <unk>.
Outdoor power equipment company had it had a worried you another 11 million a piece of business.
Okay.
Given that you haven't they they presumably awarded that before you had actually produced any of the current.
Of the current program for them, what led them to.
To want to give you more business before you had done any.
Well, we've been interacting with them for over a year now.
We've had people in their factory and they've had people at our factory for over a year.
We've been in the design process for over nine months.
We started quoting on this new piece of business.
While we were still.
Trying to get the current design it does but in fact, it wasn't awarded to us until.
Until just last week so.
It wasn't really awarded until they saw the first chunk of.
Ooh almost first chunk of product go out the back door.
Okay.
Hi, congratulations okay that.
That does help and then let's talk a little bit about Vietnam, you had mentioned that customers or prospective customers can now go and tour of the factory what what is the prognosis look like for filling that factory.
It looks very helpful.
To the point that we have looked at.
Land availability close to the factory.
And since.
Since I have not been to that factory, what does the availability of land facilities and labor.
Looked like in that near area is it us as convenient as S. Whereas we're literally everything is contiguous.
So far yes.
And.
What level of expansion are you are you currently are currently considering.
We're not currently considering anything we're just beginning to think it would be wise to have a good understanding of what's close and how fast it's going to get gobbled up by other folks.
And then what about the labor.
Factoring in Iraq, Greg.
Well labor is available.
Labor is still looks good in the region we're in.
Some of the other regions are getting tighter, but where we're at looks very good so far.
Okay. That's that's helpful. Thanks, and then speaking of labor.
Hey, Bill speaking of labor, maybe we're going to stay in place.
In the last two months, we've hired 1000 people in Auris.
And how does that compare to a normal amount of hiring that you would do because presumably some of those people are replacing those who have left and just the whole great resignation concept, but talk to us about that.
I'd say the normal number over that period would be maybe a couple of hundred.
And that period was what again.
A couple of months.
I thought you said.
So normal run rate of 100 people a month you'd be hiring and now you're hiring 500.
Yeah that might.
Okay.
So that might start to answer my next question, which is is wage pressure in.
In Mexico.
Accelerating decelerating or kind of what's your view of what's happening there.
Well it feels to us as if the wage pressure is flattening out.
And what do you attribute that to.
There are many factors dimension.
Okay.
And.
Are you a bit surprised at is as youre trying to hire.
Higher five times as many people as you normally would in a period of time that you're you're sensing the labor pressures are wage pressures are mitigating I mean that sounds pretty positive.
Okay.
Well.
I am kind of enthralled with the whole demographic.
Situation across the globe.
And if you spend some time looking at that Mexico and the states are.
Sure.
Basically uniquely positioned compared to the rest of the world.
And the fact that we are at about the age ourselves into oblivion.
And so I would expect that.
Even though they may raise prices by.
By law in Mexico, the availability of gender.
Generally younger people, who are looking to start their professional life continues to be good in Mexico.
And in the states compared to the rest of the world.
Right Yeah, Okay.
Well, thank you I appreciate it and.
Look forward to seeing the coming quarters.
Thank you.
Yes.
Bill.
Our next question comes from Sheldon Grodsky Grodsky Associates. Please go ahead.
Okay, well, you're attempting the as I listen to all the questions and answer them and you've mentioned.
So your bidding activity is going up at an extraordinary rate and your backlog is growing rapidly.
How much do you think you could.
The increase.
Unit volume was I know units are all different in this business, but how much do you think you could increase unit volume.
Sure.
If you had the contracts in hand, and then let's say in the next two years.
Let me try 50% to 100%.
It sounds like you know what I'm talking about 20%.
Sheldon I don't want to be dismissive of your question, but.
But in the reality that we face I can't answer it because we have.
We have pieces of business that are 8000 dollar per printed circuit board.
And we have other pieces of business that are 15 cents for a sensor.
So when I talked about when you ask about unit volume. It's just it's impossible for me to even answer.
Yeah.
There is.
Square footage that we have availability of.
The equipment to replicate lines.
Continues to get faster and faster for a given dollar of expenditure.
And.
The availability of that equipment, which used to be.
Almost unobtainium is now getting better.
The big question for Us and you as an investor is.
Do we see a big recession coming.
Or do we see.
The improvement in commodity availability.
And unemployment and everything else kind of swapping over the efforts of the fed to drive inflation down that's more of a question of what's going to happen to our growth.
That is our ability to add three or four SMT lines and 1 billion Bucks apiece.
What do you think the.
From the macro economical.
You've just been dealing with.
A few years of craziness between Covid and supply chain difficulties, what do you think would be the major constraint.
Again aside from the <unk>.
General macro economy, what would be the biggest constraint on your growth would it be on the design side would it be on the manufacturing side or just on the marketing side.
I think.
I think the major constraint at this point would be continuing to absorb programs, while providing the level of service that a new customer expects and demands.
I don't I don't think you guys had and it's not to say that you truly sure dumber or anything because I'm, not saying that but I don't think you have an appreciation at.
I don't think you have an appreciation for what has to happen to move a program from <unk>.
Competitor.
To our factory.
Or just start up a new design and move it into our factory. It's incredibly complex I think I don't know if I shared with you guys that we buy over 2 billion components.
In the nine month period.
So every one of those components SaaS to get into our system.
Has to get purchased at a timely.
Period has to be purchased at the right price.
Has to be delivered through whatever delays are happening in <unk>.
Has to get to our incoming inspection and has to be used in a way that has been documented and laid out by our engineers.
So that process is incredibly taxing.
And.
Time consuming.
Well, it's a it's a soft constraint rather than a do we have enough square feet do we have enough molding machines do have enough placement machines do we have enough staffers.
And each piece of business.
Can be dramatically differ you can have a customer who.
Doesn't even have as bill of material anymore, because he has been in China along that he's just been counting on is China suppliers to do it for him it.
It doesn't have any engineers anymore.
So theres really nobody we can even talk to you about.
What's important and what's not important about the design.
<unk> doesn't have.
Pipeline of components ordered.
So depending on lead times it could take.
Nine months to a year to get components here.
And who has got a bad relationship with the supplier he's leaving.
And so the ability for us to step into that pipeline and just assume T. OS is very minimal.
So I guess that's.
Long winded answer, but it's it's why I cant just give you a simple percentage.
Okay.
I wont hold it against you.
Thank you.
And my best.
Sure.
Okay.
Our next question comes from Bill <unk> with Titan Capital. Please go ahead.
Thank you I thought I was done, but Greg I'm Gonna take debate that you referenced the economic environment.
What insights are indicators do you have a weakening economic environment versus our versus not.
You know.
I read all the stuff I can get my hands on as far as what people are predicting and then I tried to compare that to what we're seeing from our.
Customers.
We have yet to see.
Any indication whatsoever of a broad based slowdown or pushout of orders.
We have.
<unk> seen people who cut their forecast.
Coming back with Oh, God, we need upside now that has been more prevalent and people cutting their forecast and leaving it cut.
Yeah.
We do see.
A better availability as I said previously on <unk>.
S&P equipment, which is said to be a leading indicator.
We do see a better availability of componentry.
Better is a relative term it still sucks.
We still see.
Inflation in component cost, we see people coming in just today a component that goes on one of our highest volume products.
Yes.
That integrated circuit manufacturer came in with a.
Got it.
About a 4% increase.
And it's not a less a negotiated about it.
Take it or leave it we got other people that want to buy it.
So as of right now.
I don't see a broad based.
Slowdown.
Okay.
But that is that seems to be in conflict with everything I read.
And hear from people that are talking about it.
So right now we've become.
As a result of everything we learned during COVID-19.
We've become very hardcore on.
Forcing our customers too.
ONEOK for any upsides or on the comm purchases we make.
Because we're being extra cautious due to the fact that the world thinks that a recession is coming.
So I don't know your you are the more economist than I am but thats.
What we see from our order book and from our purchase book.
Thank you appreciate the insight.
Less inside and more data, but anyway.
With me today.
Yes.
Okay.
Okay.
This does conclude today's question and answer session.
I will turn the call back to Mr Gates for any additional or closing remarks.
Okay. Thanks, again to everybody for participating in today's conference call, Brett and I look forward to talking to you all next quarter.
Okay.
This concludes today's call. Thank you for your participation and you may now disconnect.
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