Q3 2023 Key Tronic Corporation Earnings Call
Thank you for standing by you were currently on hold for the third quarter of fiscal 2023 Key Tronic Corporation Conference call. At this time, we are assembling today's audience and we plan to be underway. Shortly we appreciate your patience. Please remain on the line.
[music].
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Good day and welcome to the third 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 Mr. Brett Larsen. Please go ahead.
Thank you good afternoon, everyone I am Brett Larsen Chief Financial Officer of key Tronic.
I would like to thank everyone for joining us today for our Investor Conference call.
Joining me here in our Spokane Valley headquarters is Craig Gates, our President and Chief Executive Officer has always I would like to remind you that during the course of this call.
Make projections.
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 Ks.
Please note 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 one 2023 for the third quarter of fiscal 2023, we reported record quarterly total revenue of $164 6 million up.
19% from $138 4 million in.
In the same period of fiscal 2022.
As expected the significant increase in revenue for the third quarter of fiscal 2023 included approximately $20 million in production for the large program with a leading power equipment company as well as increased demand from a number of other customers.
For the first nine months of fiscal 2023, our total revenue was $425 5 million up.
5%.
Four 5% from $405 $6 million in the same period of fiscal 2022.
For the third quarter of fiscal 2023 year gross margin was eight 7% and operating margin was three 1% up from a gross margin of eight 3% and an operating margin of 2.0% in the same period for fiscal 2022.
Our gross margin in the third quarter of fiscal 2023 benefited from increased revenue levels and some stabilization in the labor market.
But it was adversely impacted by a strengthening of the Mexican peso relative to the U S dollar.
For the third quarter of fiscal 2023, our net income was $2 million or <unk> 18 per share up a 100% from $1 million or nine cents per share for the same period of fiscal year 2022.
Our results for the third quarter of fiscal 2023 include a gain on insurance proceeds of roughly $400000 were approximately <unk> <unk> per share related to equipment damage in the storm at our Arkansas facility earlier in the year.
For the first nine months of fiscal 2023, net income was $4 1 million.
Dollars or <unk> 38 per share up 73% from $2 4 million or 22 per share for the same period of fiscal 2022.
Turning to the balance sheet, we ended the third quarter with total working capital of $199 million and a current ratio of 2.2 to one our.
Our receivables increased by $14 $1 million from a year ago, reflecting the growth in our revenue levels.
At the same time, our Dsos were at 79 days down from 92 days, a year ago, which which we believe reflects improvement among certain customers with respect to disruptions from COVID-19 and supply chain issues.
At the end of the third quarter of fiscal 2023, our inventory decreased by approximately $17 4 million.
Roughly 10% from the prior period.
Primarily reflecting increased shipments during the quarter.
While the state of the worldwide supply chain still requires that we look at much further in the future than in historical periods.
We attempt to carefully balance customer demand and the likelihood of successfully bringing in parts in time for our planned production.
In coming quarters, we expect to see our inventory levels continue to decrease in inventory turns to continue to improve.
Total capital expenditures were about $1.1 million for the third quarter of fiscal 2023, and we expect total capex for the year to be around $9 million we've.
We've also utilized the insurance proceeds from the storm damage to modernize our operations, which should increase efficiencies in our Arkansas facility.
While we're keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production equipment.
M T equipment and plastic molding capabilities.
Utilized leasing facilities as well as make efficiency improvements to prepare for growth and add capacity.
Despite disruptions from the global supply chain that have continued to limit production and adversely impact operating efficiency operating efficiencies, we are expecting significant growth in fiscal 2023.
For the fourth quarter of fiscal 2023, we expect to report revenue in the range of $150 million to $160 million in earnings in the range of 10 to.
<unk> 20 per diluted share.
While profitability has improved with increasing revenue higher interest rates on our line of credit and the strong Mexican peso will continue to limit a portion of that expected to improve.
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 to continue profitably expand our business over the longer term.
That's it for me Craig.
Okay. Thanks, Brett.
We're pleased with the significant growth in our revenues and earnings in the third quarter of fiscal 2023.
Driven by our successful ramp of new programs, including major contributions from the large power equipment program.
Production for that program is now fully on track.
During the third quarter of fiscal 2023, we continue to see the favorable trend of contract manufacturing returning to North America.
Currently awarded New business has created backlog that will support over 20% growth in the U S sites over the next fiscal year.
We have continued to expand our customer base and won new programs involving security equipment you know.
Pinball machines mining safety and productivity products as well as communication devices.
Global logistics problems War in Europe .
And China U S. Geopolitical tensions continue to drive Oems to examine their traditional outsourcing strategies.
We believe these customers increasingly realize that they have become overly dependent other China based contract manufacturers for not only product, but also for design and logistics services.
Over time.
The decision to onshore or nearshore production 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, so offer the ideal solution for customers as they move to respond to Jill that political pressures.
Our facilities in Mexico represent a campus of a million 0.1 square feet.
Whereas.
Most of which is continuously located in nine 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.
A growing number of potential customers are actively evaluating a migration of their China based manufacturing to our facility in Vietnam.
Our Shanghai plant has added capabilities and management staff and systems that allow it to serve Chinese customers directly Shanghai is replace the business that we moved to Vietnam and 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.
On the ground in China.
The combination of our global footprint and our expansive design capabilities is proving to be extremely effective in capturing new business.
Many of our large and medium size manufacturing program wins are predicated on key tronic is deep and broad design services.
And once we have completed the design and wrapped it 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 molding below gasses as multi shot as well as PCB assembly metal forming painting and coating.
Complex high volume automated assembly and the design construction and operation of complicated test equipment.
This expertise may set us apart from our competitors are of similar size.
As a result, a customer looking to leave their contract manufacturer will find a one stop shop and key tronic.
Which is expected to make the transition to our facilities and much less risky and cobbling together a group of providers each loaded into a portion of the value chain.
We believe global logistics problems, China U S political tensions and heightened concerns about supply chains will continue to drive the favorable trend of contract manufacturing returning to North America.
As well as our expanding Vietnam facilities. The fact that we are continuing to see significant backlog levels in the fourth quarter indicates our growing momentum.
Along with our records, we are setting for revenue, we see a noteworthy improvement in all metrics associated with business development.
For example over the past year, the number of active quotes with prospective customers has increased significantly.
This unprecedented increase in demand for our unique mix of skills location and people.
As powerful applications beyond the obvious revenue growth potential in particular, we have been able to negotiate more favorable pricing terms.
Business parameters than in the past as well as to be much more selective in our new customers we bring on.
While this shift in leverage or that manifest in the short term its effect on our long term performance should be profound.
We move into the fourth quarter with significant backlog levels and a strong pipeline of potential new business.
And we're seeing improvement in the global supply issues and lower labor turnover.
Which severely limited our production in prior periods.
We're encouraged by our progress and potential for growth.
This concludes the formal portion of our presentation, Brett and I will now be pleased to answer your questions.
Yeah.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad.
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We will take our first question from Bill <unk> with Titan capital. Please go ahead.
Thank you relative to the.
For wins that you had this quarter.
What is the size of each of them where are they existing customers with new programs or new customers and were any of these for Vietnam.
No more for me and.
The largest was a new program actually with a new division a different division or a current customer.
It's worth 15.
Exelon was new customer worth about five.
Thanks, a lot of new customer worth about three and four.
Next one new customer worth about three and that are quite a few other smaller ones total of around one seven.
For the total in this last quarter.
So these wins are primarily if there isn't that a $5 million range I'm presuming. These are coming to the two U S locations.
Yep the top on a 15 million dollar ones go onto whereas the other four or three plus miscellaneous or go on to the U S.
Right and you did say the first one was 15, one five correct.
Correct, yes, okay. Thank you and so.
These that are going to the U S locations are those coming from China or it was just a business that's being picked up.
Around the country from your internal manufacturing or other Oh, there are U S manufacturers.
Let's see the biggest one.
Those U S came from China and the other three are.
People that were doing it in the states.
That's that's helpful and then.
Anything else you'd like to add on the on any of these.
No.
Shifting then to the.
Two the power equipment company.
Talk to us about the future with with that relationship.
Just like a one and done sort of deal does this go on.
How how are you thinking about this.
Well the first piece of business.
We'll be in a bit of a slowdown from the end of this current quarter.
True.
First quarter of next fiscal year, and then that will ramp back up to larger than it was this year.
And then once we complete that seasons worth.
You have already been awarded to other pieces of a off cycle business.
That will fill in next year's summer production with other products. So it's definitely not a one and done.
The relationship has been a success and is going to expand over the coming periods.
Congratulations so I presume then that with your guidance.
Revenue guidance being down.
It's a bit sequentially, that's really the seasonality that you're referencing with this customer.
Yes.
And if I just heard you correctly is that next year, we won't have the seasonality because of the two additional two additional programs you've won.
Yep.
Excellent Alright, that's that's helpful and then would.
Would you further dive into one of your opening comment and it was also in the press release.
That you have potential customers.
Is that are you evaluating the Vietnam facility and moving the product from China there.
Uh huh.
So, let's just follow the trend we've been talking about is people are trying to find.
Solutions too.
He focusing so much of their.
Production in China.
And there are places people are looking at India, Vietnam Eastern Europe , Mexico.
United States. So it just depends on our customers given situation.
And where theyre going to land for which which location meets their requirements.
Okay.
And does it Vietnam.
Then its geographic location and proximity to China.
Have any meaningful benefit for either larger programs.
And so it's really competing with Mexico or smaller programs. So it's really competing with the U S or is it entirely a geographic play.
You fill in a bit more around that.
Yeah.
Yes.
Is.
Donnelley less expensive than China.
Which puts it normally less expensive than Mexico by quite a bit.
You still have the logistics problems in getting product back to the states or Europe , if that's where your product is going.
Workforce, we're finding to be excellent.
Government.
Oversight it influence we're finding to be very good.
All in all of the and I was very very positive experience for us.
The customers that are there now with us.
And how big are these customers that are that are evaluating Vietnam.
They have large programs in the 20% to $50 million to $80 million range.
And do you find yourself.
Yes, so the spirit of this question is to your likelihood of winning.
Winning lots of business. So do you find yourself as you are.
Competing for this business and in the evaluation process.
Making lots of progress working down to the finalists list or where are you finding.
Finding some.
Regular hurdles that you need to that you need to address.
Is that developing.
The only regular hurdle that we had issues with COVID-19.
And that shut us down for a while in terms of bidding prospective customers in the view the plant.
As you look at.
The way.
Oems outsource their products.
Seems like a lot of outsourcing is done and that's a response to CEO edict.
Yeah.
You know for years.
E L E D. It was go to China, I don't care, what you say China's best.
Now the CEO edict appears to be.
Get out of China, I'm, not sure where you should go come tell me, where you are going to go.
So we have people that are.
Really looking at.
Business, putting business with us and they're not sure which location they wanted to put it in.
So we've started running are setting up our quote so it's very easy for us to slip the rates and coated product out of Mexico out of the Midwest.
And out of Vietnam, and then have a discussion with our customer or prospective customer.
On the pluses and minuses of each of those all those locations and how they map onto whatever that customer situation is.
So I don't see a there is no common theme of what we have to overcome in selling Vietnam.
It's more a case of that location gathering.
Steam and acceptance.
Among people, who are making the eds without doing a whole lot of in depth analysis of the pluses and minuses of the various options.
Yeah, that's helpful. Craig and I know I've taken up a lot of time, but I would like to ask one more relative to.
Other competitors in Vietnam, and I did hear what you just said that you quote with a price for the U S. A price for Mexico in a price for Vietnam, and then talk about the pros and cons, but yes, yeah someone is making a decision that they want to be in Vietnam.
Are you finding that you all have any.
Any special advantage or disadvantage relative.
Relative to others that are in Vietnam, So that would be competing on a on the same quote.
Well one advantage we have is that we chose the right city. So denying is working out very well compared to our other two options.
Ed.
The other advantage. We have is that you run a program management out of the states most of the customers that are looking to.
Pigs in China or.
Go to Asia for the first time are comforted by the fact that their program managers will be speaking to them in English.
The American.
Time zone. So those two advantages coupled with the fact that you can get our design services.
Our production process development, our quality system.
You can get all of that.
In a new location in Vietnam is a pretty big advantage to somebody who is just starting their first offshore facility.
Or somebody who is headquartered somewhere other than the U S.
Great. Thank you on a on a fantastic quarter and it's nice to see all the successes of last through the efforts of the last few years are starting to turn into success.
License.
Thank you Beth.
We will take our next question from Sheldon Grodsky with Congrats <unk> Associates. Please go ahead.
Good afternoon everybody.
The first thing I was just going to mention.
Your stock is actually down in the aftermarket.
Do you know of any expectations that people had that were unusually high that would explain that I mean is it.
Looks like to know is it pretty good other than.
The low end of your estimates for the next quarter for earnings.
No don't know what's going on.
Okay.
Okay anyhow so.
I believe you said that.
And I hope the naysayers.
Question I believe that you said that you're expecting revenue growth over the next year.
Roughly 20%.
20% in our domestic locations.
He was domestic locations.
Correct.
Okay, let's say anything about overall.
Whenever you have that type of information out because.
We are too much affected by things we can't control.
Okay. So the 20% in the yes, okay.
In any case I keep waiting every quarter for a breakout quarter and.
Do you think this was a breakout quarter for you.
Well in my book 164 million was pretty broken.
[laughter] okay.
Uh huh.
I noticed that your interest expenses are growing very rapidly as one would expect and recurrence environment, who are moving off the zero present interest rates.
I assume that until you get to reduce some of your working capital that will probably continue to be a big number for you is that correct.
And our main goal, which we are seeing some nice success with is driving inventory out.
<unk>.
Like everybody else in our sector.
And our inventory ballooned during COVID-19 and so we're not we're working hard and effectively to drive that out.
So inventory.
Inventory down accounts receivable accounts payable down.
And I'll say that it's headed in right direction.
But for sure.
Our government is doing well, our government's doing neither us or anybody in business any favors.
Say that again please.
I said for sure our government is doing neither us or any of our competitors any papers was their current monetary policy.
Okay. Okay.
Okay, I'll, let that'd be it for my questions.
Okay. Thanks, Joe.
We will go back to Bill <unk> with Titan capital. Please go ahead.
Alright. Thank you one of the things that are.
Really haven't addressed but with the economy is the elephant in the room. It's a question of a recession.
What are you seeing from your customers really since you have such a broad base.
That would indicate that there seems to be resilient slowdown mixed messages.
Sure here with as much as you can place.
Well I saw recently that good old Elon musk that he had the most knowledge of anybody in the world about the economy.
And when I look at our 200 customers I disagree I think it's us [laughter].
To your question I think your question is very valid.
Last quarter I think I told you that we were seeing hardly any signs of a.
Change in the wind.
And unfortunately.
Right now we are beginning to see some signs of the wind changing into a bad direction.
We can probably get.
Probably got maybe 5%.
Of our.
Revenue base.
Is giving us push outs and reductions signals.
At the same time, we've got probably more than that gaming is pull in and speed up signals. So.
It's still in the mix of both.
Theres more downturn than what I saw three months ago.
Yeah.
Are there any more upturns or the upturn similar.
I'd say, the upturns or about the same.
And and given the supply chain challenges do you have a sense that some of your customers built inventory.
It is really safety stock and that some of the adjustment that you're seeing now is oh is that same group of customers.
Reversing safety stock or are you sensing that something different than that.
I don't think people were able to build safety stock.
And I think.
This.
Yes, it's honest now came along too quick for people to get safety stock build before they started seeing a downturn.
So people were already talking about a downturn before we actually cleared the majority of the supply constraints.
And.
A lot of where I see the pressure growing is in the distribution market.
People that buy parts, and then turnaround and sell them again.
They are they are really.
Being put under a lot of pressure from the manufacturers, who basically coerced.
Large volume long term forecast side of people during co.
Covid and our holding people to those forecast and orders.
So it looks to me like the a bulge in the snake is at the distribution end.
He has a distribution middle of the chain.
We've done some really really exciting.
Systematic improvements I talked about last time, how MRP works are used to work in have Leafs flip.
Flip doors on its head.
And that continues to yield all kinds of really cool results.
Hum.
Also an interesting quarter because after in many cases close to a year of arguing with customers who had committed to.
By aged inventory as long as we were able to go get it for them.
We've had.
As of today.
We don't have any large outstanding.
Aged inventory payments that were arguing on whether the customer.
And that's that's down from spending.
Probably 50% of my time, arguing with high levels within the customer base about.
The money, we were owed for aged inventory.
So we were able to get our slowed down.
Before the bulbs came through and hit us.
Yeah.
Is the implication of your last comment Craig that that you have reduced inventory further from a from the end of March.
Yep.
And by roughly how much.
A good amount.
Okay.
It's better than a bad amount. Thank you.
[laughter], let me see if I can get a more precise answer to a to a balance sheet question, but.
Actually in all seriousness is there anything else relative to what you're seeing with the customer base before I jump to the balance sheet.
Uh huh.
No I think it's in general it's it's.
Gloomier than new mirror than it was three months ago.
And should we I'm sorry go ahead.
Go ahead.
Well I guess I was wondering should we be interpreting your comments as gloomy and doomy or or just directionally, it's not as positive.
It was I mean, I look at the results and it doesn't feel gloomy and to me. So I just wanted to make sure that we're interpreting comments and results and future all all appropriately.
Yes, you asked that question because I'm not saying, we would do for key tronic, I'm, saying gloom and Doom for the overall economy.
So far our new business wins are far outstripping anything I see as recessionary pressures on our revenue.
So.
Unless something dramatically falls off a cliff.
We're exceedingly optimistic about next year.
Even with the gloom and Doom that I'm hearing from the overall market.
So.
Even if there is an overall economic slowdown and or a recession. Your view from what you see with your customer base and your new customers is that you will be able to continue to grow grow revenues on an absolute basis through a true.
Through that pressure.
As we.
Are you at today, what I know today right.
And the answer is yes, if it turns worse I don't know how bad it is gonna get yeah tore.
Italy totally understand that's that's quite helpful and and and maybe I'll circle back to questions about Vietnam since.
Since winning you know one or two of the 20 or 50 or 80 million dollar piece of business. It makes a big difference.
Do you do where would you anticipate that any of those pieces of business, we would ramp any at a pace any different than the normal pace of a piece of business coming into Mexico.
You know a meaningful side.
Well my first comment to make is that we used to say it took between nine months a year and a half two.
Ramp a new piece of business.
And we're seeing now that the time from initial contact through to actually being able to build product is dramatically decreased.
As people have become more.
Convinced that the right path and the EZ pass is.
Into locales that we.
Our strong it.
So that is sped up.
Nicely compared to what it used to be because theres not a five six months of debate within the customer on why are we not going to China, because everybody goes to China.
Well that that delay is now gone and a lot of people who call us.
It used to be.
Yeah, we're going to run a market basket analysis, and we're going to have 20 people quote on this and if you have questions don't bother me because nobody else ask questions.
It used to be probably half of the courts, we got.
No I'd say the majority of what we get as my boss says I got to get out of China, I Gotta, making decision you guys are the only guys that can find their can do X. So what can I have a plant tour.
So it's completely changed the tender and the speed of the.
Relationship as it goes from first meeting to first production.
So not to be overly focused on Vietnam.
But literally the MOOC Oh go ahead.
I said too late but I was joking.
[laughter] fair enough and it'll even be worse with this question.
But with them with the movement of.
Business from China.
Oh away from China.
Some of that likely ends up in Vietnam, and you have you have capacity there. So you can ramp quickly.
Just coming back to this this concept that with an economic slowdown that you could grow through it the Vietnam would be an important component of that equation that if we're if we're hearing you right and putting all the pieces as well.
This together right.
I'm not sure I understand why you think Vietnam stands out as an important element.
It for sure.
Yeah, I think it's because you had mentioned in response to a question that I narrowly focused on Vietnam.
You had 2050 80 million dollar pieces of business and I know that you have capacity there.
So that's where my mindset is coming from but I'd love you to to stretch my mind, if you would in and go beyond that if if if you think you'll also see that type of business potentially flowing into Mexico at the same time.
Yeah.
So.
That's why clarity is always a good thing to strive for.
We see that size business and more opportunities in Mexico and in the Midwest.
And we have capacity in Mexico and in the Midwest.
Alright, so to continue down the clarity path I'll pick a midpoint of 50 plug in between the 2050 and 80. So there are 50 million dollar pieces of business that may land in Vietnam May land in Mexico may land in the Midwest.
While the $50 million won't land in the Midwest, because that's too big but.
Certainly there is one right now that'll be 20.
Well, congratulations I mean that one piece of business. There are we'll get you a long ways towards your your 20% growth in and in the U S operations.
Yep.
Okay.
And anything else on that before I before I jump to the balance sheet now.
No.
Okay sitting here wait oxo Gulfport excellent Brett two questions relative to the balance sheet. The other current liabilities.
Dropped pretty meaningfully.
Reverse is versus the December quarter. So 18, three dropped to 12, eight and it was a pretty high or much higher a year ago also and then the long term obligations.
Also dropped sequentially I'm, sorry, when that one went up sequentially can you talk about those those changes between those balance sheet accounts. Please.
Sure Yeah, that's that's predominantly our leasing facilities, so through the new leasing standard.
It's required that you put on the balance sheet.
Specific amounts for the fair value of those leases.
The transformation from current to long term is just that we've entered into some new leases and paid some of the old.
Leases off that were.
That were that were due within that 12 month period.
Understood. So is the long term and and other long term obligations and other current liabilities. Those two are interacting with each other and bottom line I'm, just asking about how to lease assets and lease liabilities as it turns out.
Correct that is correct, Oh, Oh, okay, well my apologies for for that I didn't appreciate that was tucked in under the other category.
Thank you, both and and again, congratulations on a great quarter and.
And what the what the next few quarters might bring for you.
Thanks, Bill I appreciate it.
As a reminder, if you would like to ask a question. Please press star one and we'll pause for just a moment.
There are no further questions at this time, Mr. <unk> I will turn the conference back to you for any additional or closing remarks.
Okay, well. Thank you everybody. Thanks for participating in today's conference call, Brett and I look forward to talking with you again next quarter.
This concludes today's call. Thank you for your participation and you may now disconnect.
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