Q4 2023 Key Tronic Corporation Earnings Call
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Good day and welcome to the fiscal 2023 fourth quarter and year end Key Tronic Corporation Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Brett Larsen. Please go ahead.
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.
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 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.
Typically 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 and year ended July one 2023.
For the fourth quarter of fiscal 2023, we reported total revenue of $162.6 million.
Up 29% from $126 $2 million in the same period of fiscal year 2022.
For the full year of fiscal 2023 total revenue was $588.1 million a company record and up 11% from $531 8 million for the fiscal year of 2022.
Revenue for the for the fiscal year 2023 included new program ramps as well as increased demand from a number of long standing customer programs.
For the fourth quarter of fiscal 2023, our gross margin was eight 5% and operating margin was two 6% compared to gross margin of nine 3% and operating margin of one 8% in the same period of fiscal year 2022 or.
Our gross margin in the fourth quarter of fiscal year 2023 continued to be adversely impacted by the strengthening of the Mexican peso relative to the U S dollar.
Roughly over $20 million of production costs are denominated in Mexican peso that were impacted at.
At the same time, we continued to see improvements in our production efficiencies.
Implemented strategic labor cost reductions and have seen a gradual stabilization in the supply chain and labor markets.
For the fourth quarter of fiscal 2023, our net income was $1 $1 million were 10 cents per share up from 1 million or nine cents per share for the same period of fiscal year 2022.
For the full year of fiscal 2023, net income was $5 $2 million were 47 per share up 53% from $3 $4 million or <unk> 31 per share for the fiscal year 2022.
Turning to the balance sheet, we ended the fourth quarter of fiscal 'twenty to 'twenty three with total working capital of $198.3 million and a current ratio of 2.3 to one.
Our receivables increased by $15 $8 million from a year ago, reflecting the growth in our revenue levels.
At the same time, our Dsos were at 82, and a half days down from 92.5 days a year ago, which we believe reflects some improvement of certain customers with respect to disruptions from COVID-19, and other supply chain issues.
At the end of fourth quarter of fiscal 2023, our inventory decreased by approximately $16 $8 million or by 11% from the same time a year ago.
Primarily reflecting increased shipments and a concerted effort to drive inventory reductions.
Our inventory turns increased to three seven times in the fourth quarter of fiscal year 2023 up from two nine times a year ago.
Well 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 customer customer demand and the likelihood of successfully bringing in parts in time for planned production.
In coming quarters, we expect to see our inventory levels continue to decrease at a slower rate in line with revenue levels.
Total capital expenditures were about $400000 for the fourth quarter of fiscal 2023, and total capex for the year was $5 3 million.
During the year, we also utilize the insurance proceeds from 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 S.
SMT equipment, and plastic molding capabilities utilized leasing facilities as well as make efficiency improvements to prepare for growth and add capacity.
We move into fiscal 2024, with a strong backlog and a pipeline of potential new business, our inventory more in line with our revenue levels and we're continuing to see improvement in the global supply issues and lower labor turnover.
On the other hand, we're seeing some softening in demand from several large customer and one large customer is pausing production in this first quarter to resolve certain of their design issues.
We also expect the stronger Mexican peso and a relatively high interest expense to constraint or a bottom line.
For the first quarter of fiscal 'twenty 'twenty four we expect to report revenue in the range of $135 million to $145 million in earnings in the range of five to.
10 cents per diluted share.
Over the longer term. However, we believe that we are increasingly well positioned to win new EMS programs and continually.
And profitably expand our business.
That's it for me Craig.
Okay. Thanks, Brett.
Fiscal 2023 was a record breaking year for key tronic.
Pleased with our record annual revenue and strong earnings driven by our successful ramp of new programs.
As Bret noted revenue grew 11% and earnings grew 53% from the prior year.
Despite facing many ongoing challenges with the supply chains and labor markets.
And despite higher interest expense and foreign currency pressures.
During the year, we continued to see the favorable trend of contract manufacturing returning to North America. As a result, we continue to expand our customer base and won new programs involving a wide range of industries.
Outdoor power equipment battery management automated sprinklers biometric sensors audio technology automation.
Electric vehicles power distribution security devices video and pinball machines mining safety and productivity telecommunications inventory control clean energy.
Distribution monitoring equipment.
Global logistics problems the 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 to offer the ideal solution for our customers as they moved to respond to geopolitical pressures.
Our facilities in Mexico represent a campus of 1.1 million square feet in Juarez.
Most of which is contiguously 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 political customers a political potential customers are actively evaluating a migration of their China based manufacturing to our facility in Vietnam.
In the coming years, we expect our Vietnam facility to play a major role in our growth.
Our Shanghai plant is added capabilities and management staff and systems that allowed to serve Chinese customers directly Shanghai is replace the business that we moved to Vietnam.
And while China growth has slowed and many companies have decided to take risk mitigation steps, what they're trying to manufacturers. The fact remains that many components must be sourced from China.
Our procurement group in Shanghai, which serves the entire corporation is important for managing the childhood component supply chain on an ongoing basis.
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 deep and broad design services.
And once we have completed the design and ramping into production. We believe her 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 and 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 a one stop shop and key tronic, which is expected to make the transition to our facilities much less risky.
Cobbling together a group of providers each limited to 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 that favorable trend of contract manufacturing returning to North America.
As well as to our expanded.
Vietnamese facilities.
Along with the records, we set for revenue and strong earnings in fiscal 2023, we continue to see improvement across the metrics associated with business development.
Putting a significant increase in number of active quotes with prospective customers.
This unprecedented increase in demand for our unique mix of skills location people as powerful applications beyond the obvious revenue growth potential in particular, we have been able to negotiate.
More favorable pricing terms and business parameters that in the past as well as to be much more selective in the new customers we bring on.
While the shift in leverage will that manifest itself in the short term its effect on our long term performance should be profound.
We move into fiscal 'twenty 'twenty, four with 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.
While we see some production delays and softness in demand in Q1.
And we can expect higher interest rates and a strong peso to dampen our profitability in the near term, we're very encouraged by our progress and potential for growth in fiscal 'twenty 'twenty four and beyond.
In closing I want to emphasize that the execution of our strategy was made possible not only by our investments in plant and equipment, but even more so the skills local knowledge and talents of our people I want to thank our exceptional employees for the dedication and hard work during this past year and our shareholders for their continued support.
This continues just continues this concludes the formal portion of our presentation, Brett and I will now be pleased to answer your questions.
Yeah.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
You are using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach very quickly.
Again, Please press star one to ask a question.
We'll pause for just a moment to allow everyone an opportunity to signal for questions.
And our first question comes from Bill <unk> with Titan capital.
Yeah. Thank you would you please walk through the size of each of the of the new wins this quarter.
Yeah, It was a little bit over 10.
Close to five and close to three.
Great. Thank you and and then relative to the.
The a design issue that you're seeing with the customer what is the size of the revenue impact that's.
Supported here in the third quarter pardon me in the third calendar quarter your first fiscal quarter.
Oh, we're not quite sure yet.
Depending on when we restart.
Wood.
What would a fair way to look at that be to just see ask what was their revenue level either in Q4 or Q1 a year ago.
Probably a fair way to look at it is to say that the numbers, we're projecting had zero for that product in Q1.
And so what was.
What was the number a year ago or in in Q4.
Remember a year ago was also zero.
And Q4, I guess I can't tell you that number.
And then.
Let's actually circle back to Q4, you had a customer that was seasonally.
Slowed or ended their production in Q4 that had been pretty significant in Q3.
When will they be starting back up in and do we anticipate some revenue in Q1 from them.
That revenue is zeroed out in Q1.
In the projection we gave you.
Okay great.
Lastly.
Relative to Vietnam.
Maybe a couple of positive comments in the opening remarks could you kind of provide a more in depth update what you're seeing what you with the Vietnam. Please.
We are seeing quite a few people stop by and visit now in preparation for making that decision.
That shut down entirely for almost two years during COVID-19.
It's ramping back up again.
We're seeing Vietnam is.
More and more are.
In fashion for a procurement.
Most of our customers to think about.
So we expect a bright future there we have a land nearby to grow so we expect that.
You won't have a problem.
Spanning all facilities and we do not see as of yet denying being overwhelmed with business. So.
Everything looks pretty good so far.
And how.
How much business do you currently have in the Vietnam facility.
And what is your approximate capacity or said another way kind of roughly win with what.
You see today might you need to expand that plant.
Well 30, there now and we could probably double that maybe a little bit more before we need to explain expand the plant. It always depends on if it's just pure PCB or if its box build or somewhere in between.
Right.
Great.
Thank you Craig.
Yep.
Once again, if you would like to ask a question. Please signal by pressing star one.
Thanks.
And our next question comes from the line of George Melas with MK H management. Please go ahead.
Okay.
Hey, good afternoon guys.
George.
Hey, Brad.
I'm, just trying to put numbers to the bag.
Yeah.
The increase valuation.
The dollar.
And I sort of see that year over year, the peso going to rush into it.
Versus the dollar.
Yeah.
And so.
And tell me if I have it sort of Directionally right, if your labor cost of roughly $20 million.
Then that's sort of an increase of three and a half two.
Is that roughly right.
Yes that is correct and that $20 million, we disclosed is actually not just labor, but it's all of our Mexican peso costs, which would of course include some place in utilities and those types of things that are paid down in Mexico.
But yes, Directionally you are correct.
And do you have sort of a provision in your contracts to try to.
You'd be able to pass that to the customer or is it is it just one of you arguments.
You know in sort of some kind of.
Track renegotiation.
So the answer to that is yes, and yes.
So most of the contracts have a provision in there that allows us to increase our prices when we see this type of increase cost.
But none of those provisions ever get tripped automatically what it results is that customer being forced to pay a higher price. So it always results in a discussion about what's actually going to happen.
Okay. So just to understand that you have a clause in the contract.
But you still need to bring it up to the customer it's not automatic you need to bring it up to the customer and agree on some kind of <unk>.
Increase.
Correct.
Okay.
And.
Yeah.
So if you have a situation where you have a 2 million dollar increase.
The increase in cost.
How much of that.
Cool cool.
I guess, it's a matter of overtime, but how much.
Do you expect to recoup all of that and how much you have to eat out.
I can't really tell you George because it's there are ongoing negotiations with many customers.
Yeah.
Okay.
Okay.
Uh huh.
So quick question on that.
Yeah.
I'm a little confused by that.
Yeah.
You guys seem to have increased quite a bit I mean, usually your fourth quarter.
But I'm just trying to understand G&A progression during the year.
It seemed like it went from the high fives to the seven 7.4, so I'm just trying to understand what that is.
How do you think about it going forward.
Yeah. There is there is some some costs that have gone through SG&A. During this fourth quarter, we saw something similar last quarter.
Relative to head count and then there's also some some year end incentive compensation that gets accrued.
Okay.
So what would be a good number for that.
First half of fiscal 'twenty four.
I with.
I don't know that we get that finite in our projections.
Yes, I would assume something fairly flat to what we did last year.
Okay.
Last year was minimal.
Last year was like.
$6 million.
Yeah, and even though you are comparing.
So you are comparing quarter to quarter.
Yeah, I'm comparing our AD.
I'm, saying two things.
I'm, saying in total.
For the whole year, yes.
Yes, correct, okay, okay, great Okay.
Got it.
Okay, great I'll get back into queue. Thanks, a lot.
Yes.
Our next question comes from the line of Bill <unk> with.
Titan capital. Please go ahead.
Thank you I'd like to pick up on Vietnam again, so if it's approximately 50% utilized.
Yes.
Is there anything about that plant that would not make the normal phenomenon, where the last half of utilization is far more profitable than the first half was there anything about that that's not accurate for this facility.
No.
And what is your what's your current prognosis in terms of.
First filling that plant or bringing additional business on mis or is the pipeline.
Reasonably yeah.
Our high confidence that you are going to be selling that quickly or talk to us a little bit about that if you would please.
Well.
I'm confident that.
Year year, and a half from now.
It should be filling up nicely.
And between there you never know if you're gonna window $10 million piece of business or a bunch of awards and it's going to take a while.
So I can't really help you with the granularity.
With really what you want to know as far as how much by when.
But it's not we're not in a case, where next quarter, we're going to say that our we just put another $15 million in there because we want a piece of business. So it's always further out than that.
That's helpful Craig.
And then.
Last quarter.
You said that your revenues were going to be down sequentially because of the seasonality of one customer that had a lot of revenue in fiscal Q3. It turns out revenues were nearly flat.
Would you please discuss how you've made after that a meaningful decline in volume.
Well during the year, we have continued to win a lot of programs and as we talked I was hoping that we would be able to grow through.
What we saw as an upcoming slowdown or recession and also grow through the.
Seasonality is one of the big programs and we have seen significant growth out of our U S.
Operations and.
That has been.
What offset the decline that we're expecting.
We also didn't see as much of a decline in Q4, as we were fearing due to recession.
And we also saw some customers existing customers out of whereas bump up their demand we were able to mediate with parts.
So all three of those came together to help offset the slowdown in the seasonal product.
And the fact that we're still able to.
Ron in the numbers, we gave you for Q1 without any of that seasonal product continues to show what's happening.
Mainly in the U S base.
It partly in Juarez as we've talked we've seen.
A number of our largest customers begin to forecast a slowdown.
Due to the economy.
So we are in this quarters projections, we actually included those forecasted slowdowns from the big customers. So I.
I don't know how much worse, it's going to get.
We're still probably less than 50% of our big customers pushing out.
Okay.
But oh, if I knew the answer to that I'd be JV diamonds.
Okay, I'm going to ask you to be Jamie for a moment here.
So I decided to take that.
The Atlanta Fed's a GDP.
GDP now cast is forecasting a 5% <unk>.
G P into Q3.
And that that quantitative metric has actually been pretty accurate and in the recent quarters.
Yeah, and it's achieving an uptrend for the Q3, so would you.
What insights would you have relative to what you're seeing from your customers whether it would be the type the type of products.
Or any other threat.
<unk>, you might be able to pull through what youre seeing relative to that quantitative metric that's indicating.
The economy is holding up.
Well my biggest indicators, how many of our top customers are pushing.
Flat or pulling yet.
And.
Right now we don't see.
Well, we see one large customer that has pulled in.
Just on penetrating a new geographical market with their product.
So if you can push that aside is germane to this discussion.
We see nobody.
Holy in.
Those who are not pushing out our remaining flat.
And we're slightly below half of our large customers that are pushing out.
Nobody's in panic mode, Nobody's freak, it out and trying to cancel the next year's production.
But I don't see our customers feeling as cheerful as the fed thinks they should.
And Craig is there any common thread.
Between knee are the products that are that you are.
Having forecast pushed out on.
No not not really that I can discern I've been looking at it and thinking about it because they need to figure out if it's going to spread or if it's going to be contained or if it is going to shrink. So I can't find any type of threat to say Oh. Okay. This market is going to get hurt in this one is going to be okay.
And relative to inventory levels yeah.
Do you have any sense at whether these customers that are pushing out production, whether they are actually seeing a demand change or whether it whether there's just simply inventory adjustments taking place in the system now.
Okay.
Well that's it.
I'm not sure I can.
I answer that question because I think.
Well.
Inventory as a result of forecast.
So.
They could have been comfortable with $10 billion of inventory.
A quarter ago, and now theyre not because their forecast dipped. So the two aren't really is.
They're not really separable as variables.
We see people who are exactly that they used to be comfortable and wanted to carry X million.
Cause their forecasts continued to look strong and now their forecast has got weaker.
And they're trying to trim their inventories in relation to their forecasts.
So it's a that's the way it works is.
Thus starts slowing down as far as what's passing through their channels.
Their sales guys get worried they start dropping their forecasts the procurement folks have to decide what they should be carrying inventory and then they drop their orders to us so that all three that stuff just happens in a change it's not unrelated.
Alright got it.
Come at this from one Oh go ahead Greg.
Oh, I didn't say a word.
Alright, my apologies and I come at this from one one different angle, we have seen a couple of cases, where.
Businesses are lowering their inventory levels simply because the supply chain and procurement is improving and so theyre feeling more confident with the lower levels of inventory.
It has nothing to do with their end and demand forecasts.
How does that enter into what your customers are doing.
Ah Okay.
I understand what Youre asking sorry, it took me so long to get it.
Well, Greg I actually was asking all the other pieces also so you're good.
Okay.
Oh.
I don't think that is a very big.
Factor and what we're seeing it's a.
In fact every one of the ones that I know of.
Or due to slows in sell through rather than increase confidence in supply chain.
Yes.
And Brett right me out notes and stick them in front of me. So this just this just in.
We do see we're getting a lot more freaked out about cost of capital as they should.
So inventory levels are being scrutinized a lot harder by our customers since they got so much more.
How can you use that to your advantage in terms of.
Your inventories and <unk> accounts receivable.
Well.
Part of the way, we can use it as kind of the corollary to your question about people dropping inventories based on confidence in the supply chain.
So the discussions.
Go along the fact of Okay. We we helped you we brought in a lot of inventory we shared in the cost.
Now it's time that we need to have this inventory and we should be able to since the supply chain is getting better.
So we are going to go order on the come anymore, and if you still want us to if youre still nervous youre going to have to.
Fund us to order on the come for you.
So it becomes more of a conversation you all are still nervous and you're making this decision that will cross key tronic money.
We don't think it's justified we're happy to do it but you're going to have to back us financially.
So that's that is helping us in that respect.
Has that process begun or.
And if so kind of how has the.
The outcomes coming with that.
Well you saw that we had 16.8 I think it was reduction in inventory. That's that's certainly a part of that number and it should continue albeit at a slower pace, but we should be continuing to drive inventory out of this business.
Partially due to the improvements we've made in our ability to manage this massive.
Massive beast of all these different part numbers.
And partly due to the fact that.
A lot of our customers have become a lot more cognizant and willing to discuss inventory turns as a part of business.
And it has it has started that's that's where part of the 16 eight came from.
Excellent. Thank you for all of the perspectives and Brett. Thank you for the news flash.
Thank you Bill.
Yes.
Yeah.
And our next question comes from the line of George Melas with MK H management. Please go ahead.
Thank you guys.
Not yet.
Just to follow up on Bill's question.
With your inventory, partly because you can use them, but I think he was suggesting that partly because you were able to put some of that inventory on those customers.
With that is that the right interpretation of what you said.
Yes.
Okay.
And how many customers.
I'd say what percentage of your customers or your.
Are you able to have these discussions we had with some positive outcome.
Actually quite a large amount.
I would say the majority George really okay. That's fantastic that's great to hear that.
Okay quick question on the gross margin.
Yeah.
So the last three years, it's been roughly eight one <unk> been consistently hit 8.1 is in.
In the second half of this year it was at eight six.
Currently because of the higher revenue.
But is there something structurally.
That should lead us to.
Gross margins.
All right.
Well, if you see the pace of the peso weakened.
Throw yourself with party because that's what we'll be doing.
And we had we had the peso at its historical values. This quarter would have been a massive massive payoff for all of the work we put in.
So that is the biggest single.
Driver of what's happening with gross margin right now.
And it will normalize over time back into what we were hoping was nine plus and G. M S.
Prices get pass through in.
Other thing happen, but as it goes up.
Up like this as quickly as it has we haven't been able to respond as quickly.
So structurally we continue to get more efficient.
We will continue to drive that out by driving inventory out.
And we will continue to take on being able to take on a.
<unk>.
More positive class of customer versus 10, 15 years ago five years ago.
So all of that is headed in the right direction, but the only thing that will pop it overnight will be a change in the pace of valuation versus the dollar.
Okay and also it also back to Bill's question. If GDP is going to go up to 5% I don't know what the fed's going to do with interest rate, but sure doesn't feel like inflation disease to me.
And where do you see that.
Is it labor cost or is it because you said.
Monitoring how do you see continued.
And inflation.
It's just inflation across the board.
When inflation is going pretty fast we're we're lagging because every price increase we passed through has to be an argument with our customer right.
Right right.
Quick question about the customers it seems that the alliance.
A few years.
Better relationship with your customers.
They don't try to be down as much as possible, but they seem to be more.
Other partnerships.
The.
The fact that they are willing to discuss inventory issues and take some of that inventory on your books.
Seems to be very positive.
Would you characterize your relationship with your customer.
Well it all goes back to.
What we were talking about is as we are.
Better positioned.
Versus our competitors and versus the tides.
It is.
Easier for us to.
Pick the customers that share our our moral standards at our outlook on life.
Yes.
And that as we said we will continue to have an effect over time and has had an effect over the last couple of years as.
We went from being the you know.
Four or five years ago. The question was why are you guys. So heavy in America and.
And why are you so light in China and now the question is God. How did you guys see all of this coming to get yourselves. So heavy in America.
And ahead of the curve in Vietnam, So that makes the entire process of.
Bringing on new customers really want.
And.
And our relationship with our customers we have.
At all it just makes it so much easier than it was five years 10 years ago, when we were swimming against the tide.
Great great.
Great.
That's it for me Thanks, a lot.
Okay. Thank you George.
We will take our next question from the line of Bill Phelan with Titan Capital. Please go ahead.
Okay. Thank you I'll try to make this short relative to your conversations with customers about the peso and and changing the price.
How how long before those those price adjustments tend to work their way through.
And presumably it's not just a couple of week process.
No, it's probably more of a six month process.
So the conversations that you've been happening over the last three plus months well start to see the benefit later this calendar year and into.
The second half of your fiscal year.
Yes.
And those have to be very delicate conversations because.
There is nothing worse for our customers and raising prices.
And.
Of course, the immediate response as well as the local find somebody else and so we have to be very careful to make sure that we're not going above the market.
As we try to pass through the increased cost we've seen.
So there are very there are none where we walk in and say take it or leave it.
Okay.
That's helpful. Thank you.
Yes.
Yeah.
This concludes today's question and answer session I will now.
I will turn the call back to Craig gates for any additional or closing remarks.
Okay. Thanks, everybody for your interest and we look forward to talking with you next quarter.
Yeah.
This concludes today's call. Thank you for your participation and you may now disconnect.
[music].
Okay.