Q3 2024 Key Tronic Corp Earnings Call

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Speaker Change: Good day and welcome to the third quarter of fiscal 2020 for key Tronic Corporation Conference call Today's conference is being recorded.

Operator: Good day, and welcome to the third quarter fiscal 2024 Keytronic 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.

Speaker Change: At this time I would like to turn the conference over to Brett Larsen. Please go ahead.

Brett R. Larsen: Good afternoon, everyone. I am Brett Larsen, the Chief Financial Officer of Key Tron. I would like to thank everyone for joining us today for our investor conference. Joining me here at our Spokane Valley headquarters is Craig Gates, our President and Chief Executive Officer, and Tony Voorhees, our Vice President of Finance and Corporate Controller. 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.

Speaker Change: Good afternoon, everyone I am Brett Larsen Chief Financial Officer of key Tronic.

Brett R. Larsen: I'd like to thank everyone for joining us today for our Investor Conference call.

Brett R. Larsen: Joining me here in our Spokane Valley headquarters is Craig Gates, our President and Chief Executive Officer, and Tony Voorhees, Our Vice President of Finance and corporate controller.

Brett R. Larsen: 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 SBA. Specifically, our latest 10K, quarterly 10Qs, and 8K. 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.

Brett R. Larsen: As always I would like to remind you that during the course of this call.

Brett R. Larsen: Might make projections or other forward looking statements regarding future events or the company's future financial performance.

Brett R. Larsen: Please remember that such statements are only predictions.

Brett R. Larsen: 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.

Brett R. Larsen: Specifically, our latest 10-K quarterly 10, Qs and eight Ks.

Brett R. Larsen: Please note that on this call, we will discuss historical financial and other statistical information regarding our business and operations.

Brett R. Larsen: Some of this information is included in today's press release and a recorded version of this call will be available on our website.

Brett R. Larsen: Today, we released our results for the three months ended March 30th 'twenty 'twenty four for the third quarter of fiscal 'twenty 'twenty four we reported total revenue of one <unk>.

Brett R. Larsen: Today, we released our results for the three months ended March 30th, 2024. For the third quarter of fiscal 2024, we reported total revenue of $140.5 million dollars compared to $164.6 million dollars in the same period of fiscal year 2022. Revenue for the third quarter of fiscal 2024 was constrained by approximately $5 million due to severe winter weather events that took Key Tronics facilities in Mississippi and Arkansas offline for approximately two weeks. In addition, we saw softening demand for a number of different programs produced in Mexico.

Brett R. Larsen: $45 million compared to $164 6 million in the same period of fiscal year 2023.

Brett R. Larsen: Revenue for the third quarter of fiscal 2024 was constrained by approximately $5 million due to severe winter weather events that took key tronic facilities in Mississippi, and Arkansas offline for approximately two weeks.

Brett R. Larsen: In addition, we saw softening demand for a number of different programs produced in Mexico.

Brett R. Larsen: For the first nine months of fiscal 2024, our total revenue was $433.7 million, compared to $425.5 million in the same period of fiscal 2023. For the third quarter of fiscal 2024, our margins and profitability were significantly impacted by an unusual combination of events. First, we incurred severance costs of approximately $3.7 million, or $0.27 per diluted share, as we reduced our workforce by over 450 employees in Mexico. The severance costs were incurred late in the third quarter, which limited the payroll expense reduction that could be recognized for the quarter. We also continue to be adversely impacted by high labor costs and interest rates and by the continued strengthening of the Mexican peso.

Brett R. Larsen: For the first nine months of fiscal 2024, our total revenue was $433 $7 million compared to $425 5 million in the same period of fiscal 2023.

Brett R. Larsen: For the third quarter of fiscal 'twenty 'twenty, four our margins and profitability were significantly impacted by an unusual combination of events first we incurred severance costs of approximately $3 $7 million or 27 cents per diluted share.

Brett R. Larsen: Relative to the U.S. dollar, the peso rose by approximately 5%, increasing our expenses by approximately $1.5 million, or 11 cents per dollar to share. Furthermore, temporary facility closures in the U.S. due to severe weather resulted in a loss of contribution margin of approximately $1 million, or $0.07 per diluted share. As a result of these factors, our gross margin was 5.8 percent, and our operating margin was a loss of 0.4 percent for the third quarter of fiscal 2024, compared to a gross margin of 8.7% and an operating margin of 3.1% in the same period of fiscal year 2020.

Brett R. Larsen: As we reduced our workforce by over 450 employees in Mexico.

Brett R. Larsen: The severance costs were incurred late in the third quarter, which limited the payroll expense reduction that could be recognized for the quarter.

Brett R. Larsen: We also continued to be adversely impacted by high labor costs and interest expense and by the continued strengthening of the Mexico peso Mexican peso.

Brett R. Larsen: Relative to the U S dollar the peso rose by approximately 5%, increasing our expenses by approximately $1.5 million or 11 cents per diluted share.

Brett R. Larsen: Furthermore, the temporary facility closures in the U S. Due to severe weather resulted in lost contribution margin of approximately $1 million or seven cents per diluted share.

Brett R. Larsen: As a result of these factors our gross margin was five 8% and operating and operating margin was a loss of <unk>, 4% for the third quarter of fiscal 2024.

Brett R. Larsen: Compared to gross margin of eight 7% and an operating margin of three 1% in the same period of fiscal year 2023.

Brett R. Larsen: Our net loss was $2 $2 million or 21 cents per share for the third quarter of fiscal 2024 <unk>.

Brett R. Larsen: Our net loss was $2.2 million, or $0.21 per share, for the third quarter of fiscal 2024, compared to net income of $2 million, or $0.18 per share, for the same period of fiscal 2023. For the first nine months of fiscal 2024, our net loss was $802,000, or $0.07 per share, compared to net income of $4.1 million, or $0.38 per share, for the same period of fiscal year 2023.

Brett R. Larsen: <unk> to net income of $2 million or <unk> 18 per share for the same period of fiscal 2023.

Brett R. Larsen: For the first nine months of fiscal 2024, the net loss was $802000 or seven cents per share compared to net income of $4 $1 million or 38 cents per share for the same period of fiscal year 2023.

Brett R. Larsen: As we also noted in today's earnings release, we cured a breach of our fixed charge coverage ratio covenant in our asset based revolving credits credit facility as of the ended the third quarter by executing a new amendment to the agreement with our lender today.

Brett R. Larsen: As we also noted in today's earnings release, we cured a breach of our fixed charge coverage ratio covenant in our asset-based revolving credit facility as of the end of the third quarter by executing a new amendment to the agreement with our lender today. This amendment will provide relief on the financial covenants for the next 12 months, increase the interest rate by 100 basis points, and advance the maturity date of the agreement to September of 2025.

Brett R. Larsen: This amendment will provide relief on the financial covenants for the next 12 months.

Brett R. Larsen: Increase their interest rate by 100 basis points and advance the maturity date of the agreement to September of 2025.

Brett R. Larsen: Turning to the balance sheet, we ended the third quarter of fiscal 'twenty 'twenty, four by reducing inventory by approximately $39 million or roughly 22%.

Brett R. Larsen: Turning to the balance sheet, we ended the third quarter of fiscal 2024 by reducing inventory by approximately $39 million, or roughly 22%, from the same time a year ago. These improvements in inventory levels primarily reflect increased component availability and our concerted effort to drive inventory reduction. We're pleased to see our inventory levels continue to become more in line with our current revenue. However, at the same time, the state of the worldwide supply chain still requires that we drive demand for parts differently than in historical periods.

Brett R. Larsen: The same time a year ago. These.

Brett R. Larsen: These improvements in inventory levels, primarily reflect increased component availability and our concerted effort to drive inventory reductions.

Brett R. Larsen: We're pleased to see our inventory levels continued to become more in line with our current revenue at.

Brett R. Larsen: At the same time the state of the worldwide supply chain still requires that we drive demand for parts differently than in historical periods.

Brett R. Larsen: Our customers have revamped their forecasting methodologies, and we have significantly modified and improved our materials resource planning algorithm. As a result, we should be better equipped for future disruptions in the supply chain, even as we continue to manage inventory more cost effectively. During the third quarter, we also reduced our accounts payable, leasing obligations, and overall debt by a combined amount of $57.1 million from a year ago. As a result, our current ratio was 2.8 to 1 compared to 2.2 a year ago.

Brett R. Larsen: Our customers have revamped their forecasting methodologies and we have significantly modified and improved our material sourcing.

Brett R. Larsen: Materials resource planning algorithms.

Brett R. Larsen: As a result, we should be better equipped for future disruptions in the supply chain.

Brett R. Larsen: Even as we continued to manage inventory more cost effectively.

Brett R. Larsen: During the third quarter, we also reduced our accounts payable leasing obligations in overall debt.

Brett R. Larsen: The combined amount of $57 $1 million from a year ago.

Brett R. Larsen: Our current ratio was 2.8 to one compared to two point to a year ago.

Brett R. Larsen: At the same time, accounts receivable DSOs were at 83 days compared to 79 days a year ago, which we believe reflects some increased delays in collections from certain customers, despite continuing improvement from most customers with respect to disruptions from supply chain issues. Total capital expenditures were $0.7 million for the third quarter of fiscal 2024, and we expect total CapEx for the year to be around $5 million. While we're keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production equipment, SMT equipment, and plastic molding capabilities, utilize leasing facilities, as well as make efficiency improvements to prepare for growth and add capacity, particularly in our U.S. and Vietnam locations.

Brett R. Larsen: At the same time accounts receivable Dsos was at 83 days compared to 79 days a year ago, which we believe reflects some increased delays in collections from certain customers. Despite continuing improvement of most customers with respect to disruptions from supply chain issues.

Brett R. Larsen: Total capital expenditures were <unk> $7 million for the third quarter of fiscal 2024, and we expect total capex for the year to be around $5 million.

Brett R. Larsen: While we're keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production.

Brett R. Larsen: Equipment, SMT equipment, and plastic molding capabilities utilize eat leasing facilities as well as making efficiency improvements to prepare for growth and add capacity.

Brett R. Larsen: Particularly in our U S and Vietnam location.

Brett R. Larsen: For the fourth quarter of fiscal 'twenty 'twenty four we're seeing a rebound among our legacy customers relative to our third quarter.

Brett R. Larsen: For the fourth quarter of fiscal 2024, we're seeing a rebound among our legacy customers relative to the third quarter, and a strong backlog of new customer program opportunities. For the fourth quarter of fiscal 2024, we expect to report revenue in the range of $135 million to $145 million. While new programs continue to ramp up in our Mexico facilities, efficiency improvements, a muted rebound to pre-COVID production levels amongst existing Mexico customers, and the continued pressure of a strengthened peso combined have prompted us to reduce our overhead in our warehouse facility.

Brett R. Larsen: And a strong backlog of new customer program opportunities.

Brett R. Larsen: In the fourth quarter, we expect to incur additional severance expense of approximately $500,000 to $1 million from additional headcount reductions in our Mexico-based operations late in the fourth quarter. The payback period for this decision is expected to be under a half of a year. Taking all these factors into consideration, we expect net income to be in the range of $0.03 to $0.210 per diluted share.

Brett R. Larsen: For the fourth quarter of fiscal 2024, we expect to report revenue in the range of $135 million to $145 million.

Brett R. Larsen: While new programs continue to ramp in our Mexico facilities efficiency improvements a muted rebound to pre COVID-19 production levels amongst existing Mexico customers.

Brett R. Larsen: The continued pressure of our strength in peso combined.

Brett R. Larsen: Combined prompted us to reduce our overhead and I'll walk you know whereas facilities.

Brett R. Larsen: In the fourth quarter, we expect to incur additional severance expense of approximately 500000 to $1 million from additional head count reductions in our Mexico based operations late in the fourth quarter.

Brett R. Larsen: The payback period for this decision is expected to be under half of the year.

Brett R. Larsen: Taking all of these considering these factors into consideration we expect net income to be in the range of <unk> to 210 cents per diluted share.

Brett R. Larsen: In the fourth quarter of fiscal 2024 and moving into fiscal 2025, we expect continued sales growth in the U.S. and Vietnam, and we have a strong pipeline of potential new business. Over the longer term, we believe that we are increasingly well positioned to win new programs and to continue to profitably expand our business. Craig. Okay.

Brett R. Larsen: In the fourth quarter of fiscal 'twenty, 'twenty, four and moving into fiscal 2025, we expect continued sales growth in the U S and Vietnam, and we have a strong pipeline of potential new business.

Brett R. Larsen: Over the longer term, we believe that we are increasingly well positioned to win new programs and to continue to profitably expand our business that's.

Brett R. Larsen: That's it for me Craig Okay. Thanks, Brett.

Craig D. Gates: Okay. Thanks, Brett.

Speaker Change: During the latter half of fiscal 2024, we're taking necessary steps to reduce our workforce at Mexico.

Craig D. Gates: During the latter half of fiscal 2024, we are taking necessary steps to reduce our workforce in Mexico due to the softening demand for a number of different programs with high support, labor, and content, which is expected to save us more than $10 million annually. In the coming quarters, we expect sales from Mexico-based production to recover due to recently won programs, and we do not anticipate needing to increase our headcount in the coming periods, reflecting the significant improvements to our operating efficiency.

Craig D. Gates: Due to the softening demand for a number of different programs with high support labor content, which is expected to save us more than $10 million annually.

Craig D. Gates: In the coming quarters, we expect sales from Mexico based production to recover due to recently won programs and.

Brett R. Larsen: And we do not anticipate needing to increase our head count in coming periods.

Brett R. Larsen: Reflecting the significant improvements to our operating efficiencies.

Craig D. Gates: At the same time, our ORES site is being restructured to focus on higher volume manufacturing, while lower volume products with higher service level requirements will migrate to our other sites. We're also pleased to see overall improvements in our operating efficiencies and inventory levels and other improvements made on the balance sheet.

Brett R. Larsen: At the same time, our war is site is being restructured to focus on higher volume manufacturing.

Brett R. Larsen: While lower volume products with higher service level requirements will migrate to our other sites.

Brett R. Larsen: We're also pleased to see overall improvements in our operating efficiencies and inventory levels and other improvements made on the balance sheet.

Brett R. Larsen: During the quarter, we continued to expand our customer base and winning new programs.

Craig D. Gates: During the quarter, we continued to expand our customer base, winning new programs involving up to $20 million in an energy management account, around $5 million in a telecommunications account, around $3 billion in a consumer audio account, and around $5 million in industrial manufacturing. The strong pipeline of new business underscores a continued trend toward onshoring and dual sourcing of contract manufacturing. Global logistics problems and China-U.S. geopolitical tensions continue to drive OEMs to examine their traditional outsourcing strategies.

Brett R. Larsen: Bobbing up to $20 million in energy management count around $5 million in the telecommunications account.

Brett R. Larsen: Around $3 million in consumer audio workout.

Brett R. Larsen: And around $5 million in industrial manufacturing head count.

Brett R. Larsen: The strong pipeline of new business underscores the continued trend towards onshoring and dual sourcing of contract manufacturing.

Brett R. Larsen: Global logistics problems in 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.

Craig D. Gates: We believe these customers increasingly realize that they have become overly dependent on their China-based contract manufacturers for not only product but also 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 growth, and those opportunities are becoming more clearly defined. At the same time, we are seeing a sustained trend of a strong Mexican peso and continued increases in Mexican wages, particularly along the U.S.-Mexican border.

Brett R. Larsen: Other China based contract manufacturers are not only product, but also for design and logistics services.

Craig D. Gates: Over time, the decision to onshore or nearshore production is becoming more widely accepted as a smart long term strategy.

Brett R. Larsen: As a result, we see opportunities for growth and those opportunities are becoming more clearly defined.

Brett R. Larsen: At the same time, we are seeing a sustained trend of strong Mexican peso and continued increases in Mexican wages, particularly along the U S Mexican border.

Brett R. Larsen: And it has become clear that these changes at base cost of Mexican production are longstanding. It has also become clear that customers have a different calculus for selecting a geographic location for businesses that they are bringing back from China.

Craig D. Gates: As it has become clear that these changes in base cost of Mexican production are longstanding, it has also become clear that customers have a different calculus for selecting a geographic location for businesses that they are bringing back from China. For those customers who struggled with Chinese production due to their flexibility needs, the decreasing cost differential between our U.S. and Mexico plants means that they will probably choose one of our U.S. sites.

Brett R. Larsen: Okay.

Craig D. Gates: For those customers, who struggle with China production due to their flexibility needs the decreasing cost differential between our U S and Mexico plants means that they will probably choose one of our U S sites.

Craig D. Gates: There we believe they can enjoy the ultimate flexibility engineering support and easiest communications.

Craig D. Gates: There, we believe, they can enjoy the ultimate in flexibility, engineering support, and ease of communication. Meanwhile, for those customers whose requirements have adapted to the Chinese model of limited flexibility, Challenging communications, and slow motion engineering support, our Mexican facilities remain the answer. Therefore, we are reconfiguring our Mexico sites to endeavor to be a lower cost, high quality, but commodity level service provider. Over the past 12 months, revenue from our U.S. production facilities has increased approximately 15 percent. In Q3 of 2024, production in the U.S. represented about 30% of total revenue.

Brett R. Larsen: Meanwhile, for those customers, whose requirements had adapted to the China model with limited flexibility.

Brett R. Larsen: Challenging communications slow motion engineering support our Mexican facilities remain the answer therefore, we are reconfiguring, our Mexico sites to endeavor to be a lower cost high quality, but more commodity level service provider.

Craig D. Gates: Over the past 12 months revenue from our U S production facilities has increased approximately 15%.

Brett R. Larsen: In Q3 of 2020 for production in the U S represented about 30% of our total revenues.

Craig D. Gates: While our Vietnam facility continues to be a modest contributor to our overall revenue, a growing number of potential customers are actively evaluating a migration of their China-based manufacturing to our facility in Vietnam. In coming years, we expect our RIA NOW facility to play a major role in our growth. As China growth has slowed, and many companies have decided to take risk mitigation steps with their Chinese manufacturers.

Brett R. Larsen: While our Vietnam facility continues to be a modest contributor to our overall revenue.

Brett R. Larsen: A growing number of potential customers are actively evaluating a migration of their China based manufacturing to our facility in Vietnam.

Craig D. Gates: Coming years.

Brett R. Larsen: We expect our Vietnam facility to play a major role in our growth.

Craig D. Gates: Well, China growth has slowed and many companies have decided to take risk mitigation steps with their Chinese manufacturers the.

Craig D. Gates: The fact remains that many components must be sourced from China; our procurement group in Shanghai, which serves the entire corporation, remains important for managing the Chinese 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-sized manufacturing program wins are predicated on Keytronic's deep and broad design services. And once we have completed a design and ramped it into production, we believe our knowledge of the program's specific design challenges makes that business extremely sticky.

Craig D. Gates: The fact remains that many components must be sourced from China.

Brett R. Larsen: Our procurement group in Shanghai, which serves the entire corporation.

Craig D. Gates: It remains important for managing the China component supply chain on an ongoing basis.

Craig D. Gates: The combination of our global footprint and our expansive design capability is proving to be extremely effective in capturing new business. Many of our large and medium size manufacturing program wins are predicated by key tronic is deep and broad design services and.

Craig D. Gates: Once we have completed the design and ramping into production. We believe our knowledge of the program specific design challenges makes that business extremely sticky.

Craig D. Gates: Yeah.

Craig D. Gates: We also continue to invest in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection, blow, gas assist, 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. We believe this expertise will increasingly set us apart from our competitors of a similar size. As a result, a customer looking to leave their contract manufacturer will find a one-stop shop in Keytronic, which is expected to make the transition to our facilities much less risky, putting together a group of providers, each limited to a portion of the value chain. In fact, most of the new customers we have onboarded take advantage of the one-stop shop capabilities we provide.

Craig D. Gates: We also continue to invest in vertical integration your manufacturing process knowledge, including a wide range of plastic molding injection blow gasses multi shot.

Craig D. Gates: As well as PCB assembly metal, forming painting and Cody complex high volume automated assembly.

Craig D. Gates: And the design construction and operation of complicated test equipment. We believe this expertise will increasingly set us apart from our competitors are of similar size.

Craig D. Gates: As a result, a customer looking to leave their contract manufacturer will find at one stop shop, and key tronic, which is expected to make the transition to our facilities much less risky.

Craig D. Gates: And Cobbling together, a group of providers each limited to a portion of the value chain.

Craig D. Gates: In fact, most of the new customers, we have onboard to take advantage of the one stop shop capabilities, we provide.

Craig D. Gates: 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 to our expanding Vietnam facilities.

Craig D. Gates: 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 to our expanding Vietnam facility. We continue to see improvement across the metrics associated with business development, including a significant increase in the number of active quotes with prospective customers. While the unfortunate combination of factors temporarily disrupted our growth and profitability in the third quarter, we move into the fourth quarter of fiscal 2024 with a strong pipeline of potential new business.

Brett R. Larsen: We continue to see improvement across the metrics associated with business development.

Craig D. Gates: Cleaning a significant increase in the number of active quotes with perspective customers.

Craig D. Gates: While the unfortunate combinations of factors temporarily disrupted our growth and profitability in the third quarter.

Brett R. Larsen: We move into the fourth quarter of fiscal 'twenty 'twenty, four with a strong pipeline of potential new business.

Craig D. Gates: While we're seeing improvement in our operating efficiencies, recent wage increases, higher interest rates, and a strong peso will dampen our growth and profitability in the fourth quarter. Moreover, we will continue to rebalance our manufacturing across our facilities in Mexico, the U.S., and Vietnam.

Craig D. Gates: While were seeing improvement in our operating efficiencies recent wage increases higher interest rates and a strong peso will dampen our growth and profitability in the fourth quarter.

Craig D. Gates: Or over we will continue to rebalance our manufacturing across our facilities in Mexico, The U S and Vietnam.

Craig D. Gates: We remain very encouraged by our progress and potential for profitable growth over the long term. As we previously discussed, Brett will succeed me as president and chief executive officer at the end of June, while I expect to remain a member of the board. Additionally, Tony will become our chief financial officer. Since this will be my 60th and last quarterly investor conference call, I want to express my deep gratitude to our shareholders, customers, and vendors.

Craig D. Gates: We remain very encouraged by our progress and potential for profitable growth over the long term.

Craig D. Gates: Yes.

Craig D. Gates: As we've previously discussed Brett will succeed me as President and Chief Executive Officer at the end of June well I expect to remain a member of the board. Additionally, Tony will become our Chief Financial Officer.

Craig D. Gates: Since this will be like 60 S. N last quarterly Investor Conference call I want to express my deep gratitude to our shareholders customers and vendors.

Craig D. Gates: I want to express my.

Craig D. Gates: I want to express my sincere thanks to our outstanding employees for their dedication and commitment to our success. It has been a great honor to lead this team, and I have full confidence that Brett, Tony, and their outstanding team will continue to take Keytronic to new heights. This concludes the formal portion of our presentation. Brett, Tony, and I will now be pleased to answer your questions.

Craig D. Gates: My sincere thanks to our outstanding employees for their dedication and commitment to our success.

Speaker Change: He has been a great honor to lead this team and I have full confidence that Brett Tony and their outstanding team will continue to take key trying to new heights.

Speaker Change: This concludes the formal portion of our presentation, Bret Tony and I will now be pleased to answer your questions.

Speaker Change: Thank you.

Operator: Thank you. If you are dialed in via the telephone and would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. I think your first question comes from the line of Bill Dezellem with Titan Capital.

Bill Dezellem: I dialed in via the telephone and we'd like to ask a question. Please signal by pressing star one on your telephone keypad.

Bill Dezellem: Thank you. Craig, you preempted my first question, but I did miss the energy management.

Bill Dezellem: Using a speaker phone. Please make sure your mute function is turned off to allow your.

Bill Dezellem: Your signal to reach our equipment.

Bill Dezellem: Again, Please press star one to ask a question.

Bill Dezellem: Your first question comes from the line of Bill.

Bill Dezellem: <unk> with Titan capital.

Bill Dezellem: Thank you Craig you preempted My first question, but I did miss.

Bill Dezellem: The energy management, what was the size of that one.

Bill Dezellem: He built it was my parting gift to us.

Craig D. Gates: What was the size of that one? Gee, Bill, it was my parting gift to you. That was up to $20 million. Okay, that's excellent. Thank you. Would you please walk through each of these and highlight maybe important, important aspects of them, whether they're existing customers or whether they are new customers, what was, if anything, unique about these wins that, you know, highlights a competitive advantage that you all have or something else interesting, and I do appreciate the parting gift.

Craig D. Gates: That was up to 20 billion.

Speaker Change: Okay excellent. Thank you would.

Craig D. Gates: Would you please walk through each of these and highlight may be important to them.

Craig D. Gates: Portland aspects to them, whether they are existing customers or whether they are new customers what was.

Craig D. Gates: What if anything was unique about these wins to that.

Craig D. Gates: The highlights the competitive advantage that you all have or something else interesting and I do appreciate the parking gift.

Craig D. Gates: Yeah.

Craig D. Gates: Thank you. You're welcome. The first one is... an interesting one because this is a new customer.

Speaker Change: Thank you you're welcome.

Craig D. Gates: The first one.

Craig D. Gates: Yes.

Craig D. Gates: The interesting one because this per spin it's a new customer this customer came to us almost two years ago.

Craig D. Gates: This customer came to us almost two years ago, and Hattie gave an edict that they needed to significantly increase their outsourcing in Mexico. They played a significant role in helping us upgrade our metal coating capability because they have a very high-end requirement for withstanding the salt spray test. So, after a number of changes to our chemistry and in our painting process,

Craig D. Gates: It had a.

Craig D. Gates: An edict that they needed to significantly increase their outsourcing in Mexico.

Craig D. Gates: And.

Craig D. Gates: They played a significant role in helping us upgrade our that'll coding capability.

Craig D. Gates: Because they have a very high end requirement for withstanding the salt spray test.

Craig D. Gates: So.

Craig D. Gates: After a number of changes to our chemistry and in our trading.

Craig D. Gates: Training process.

Craig D. Gates: We were able to pass that long-term salt spray test, and since then, the floodgates have opened, and they have been giving us more quotes and awards than we can handle. So, that's been a two-year success story that we were never sure was really the pot of gold at the end of the rainbow the customer was telling us. But our technical folks hung in there, and in the end, it's going to be a very nice and longstanding program.

Craig D. Gates: You were able to pass that long term salt spray test and since then the slightly flood gates have opened.

Craig D. Gates: And they have been giving.

Craig D. Gates: Giving us more quotes and awards than we can handle so.

Craig D. Gates: It's been a two year success story.

Craig D. Gates: Yeah, we were never sure was really the pot of gold at the end of the Rainbow the customer was telling us.

Craig D. Gates: But our technical folks hung in there in Indiana, it's going to be a very nice and long standing program.

Craig D. Gates: And so is this a single program, or is this, up to $20 million, one of the many programs that they are giving you?

Speaker Change: So is this a single program or is this up to $20 million one of the many programs that they are that they are giving you.

Craig D. Gates: It's already more than one program and there are many more kickoff.

Craig D. Gates: It's already more than one program, and there are many more to come.

Craig D. Gates: That's a that's helpful and the other three.

Craig D. Gates: That's helpful. And what about the other three?

Speaker Change: Are the other three are.

Craig D. Gates: The other three are pretty much run of the mill in terms of standard reasons why they chose Key Tron.

Craig D. Gates: Pretty much run of the mill in terms of standard reasons why they chose key tronic.

Craig D. Gates:

Craig D. Gates: The consumer audio is a customer in house today. This was just a new program, right? The other two are new customers and new programs for Key Tron. Thank you.

Craig D. Gates: The consumer audio is a is a customer in house today. This was just a new program right.

Craig D. Gates: They're too are our new customers and new programs for key tronic.

Speaker Change: Thank you that's that's helpful and then if.

Bill Dezellem: Thank you, that's helpful. And then, if I may, jumping to the softening demand that's referenced in the press release, and then possibly, Brett, in your opening remarks, you referenced that that has maybe even turned into a rebound. Would you pull all of that together for us, please?

Bill Dezellem: If I may I jumping to the softening demand.

Bill Dezellem: Referenced in the press release, and then possibly Bret in your opening remarks, you referenced.

Bill Dezellem: With that as a maybe even turned to a rebound would you pull all that together for us. Please.

Bill Dezellem: Yeah.

Bill Dezellem: The.

Bill Dezellem: This is somewhat of a COVID-19 hangover.

Craig D. Gates: This is somewhat of a COVID hangover. A lot of people You and I have discussed this.

Craig D. Gates: A lot of people.

Craig D. Gates: You and I have discussed this we're concerned a year ago that there was a massive COVID-19 hangover.

Craig D. Gates: We were concerned a year ago that there would be a massive COVID hangover, and what we found is that it's scattered and spotty. A couple of our large customers did have too much inventory that they had built, or had us build for them, as parts became available, and what were really COVID-driven false demand signals tempted them to continue building at a high rate, but it wasn't widespread. And as we've seen just in the last two or three months.

Craig D. Gates: Ed.

Craig D. Gates: What we found is that it's scattered and spotty.

Craig D. Gates: A couple of our large customers.

Craig D. Gates: You'd have too much inventory that they had built our head us build for them as parts became available.

Craig D. Gates: And what we're really COVID-19 driven false demand signals.

Craig D. Gates: Tempted them to continue building at a high rate.

Craig D. Gates: But it wasn't widespread.

Craig D. Gates: And as we've seen just in the last two or three months.

Craig D. Gates: Those customers have drawn down their inventory of the products we make for them to the point that their forecast and orders are rebounding to the normal throughput levels that we would expect. Well, that's really the overall set of circumstances governing what we talked about as a softening and then a slight return or muted return, I think we used the word.

Craig D. Gates: Those customers have drawn their inventory down of the products, we make for them to the point that their.

Craig D. Gates: Forecast and orders are rebounding.

Craig D. Gates: He was a normal throughput levels that we would expect.

Craig D. Gates: Well that's really.

Craig D. Gates: That's the overall.

Craig D. Gates: Set of circumstances its governing what we've talked about is a softening and then a slight return or beauty returned I think we used the word.

Speaker Change: So from your standpoint, if you were to look out just from Oh and overall economic view is it your sense that demand continues reasonably strong I'll call. It end demand and now you've worked through some inventory excess inventory in.

Bill Dezellem: So from your standpoint, if you were to look out just from an overall economic view, is it your sense that demand continues reasonably strong, I'll call it end demand, and now you've worked through some inventory, excess inventory, and so that volatility, if we were to exclude that, we're just continuing with more of the same decent demand? Is that a fair way to look at what you're experiencing?

Bill Dezellem: And then so we that volatility if we were to exclude that we're discontinuing with more of the same the decent demand is that a fair way to look at but what you're experiencing.

Bill Dezellem: Yes.

Bill Dezellem: Oh, great. Thank you and then Oh, let me jump to the severance if I may a severance came late in the quarter. As you pointed out why was that because this is something if I recall that we talked about on the last on the last call and so I would've expected it to happen sooner.

Craig D. Gates: Great, thank you. And then, let me jump to the severance, if I may. Severance came late in the quarter, as you pointed out. Why was that? Because this is something, if I recall, that we talked about on the last call, and so I would have expected it maybe to happen soon.

Speaker Change: Well when you affect People's lives and many of these people who had been with us for quite some time.

Craig D. Gates: Well, when you affect people's lives, and many of these people have been with us for quite some time, you want to be absolutely sure you're doing the right thing, and you're doing it with the right people. So it took us a little longer than we thought to get it done, but I'm confident that we have done it in a caring and professional manner and done what needed to be done.

Craig D. Gates: Would it be absolutely sure you're doing the right thing and you're doing it with the right people.

Craig D. Gates: So it took us a little longer than we thought.

Craig D. Gates: To get it done.

Craig D. Gates: But we are.

Craig D. Gates: Confident that we have done it in a.

Craig D. Gates: They're carrying and professional manner.

Craig D. Gates: And then what needed to be done.

Bill Dezellem: And Craig, this sounds a little bit different than layoffs that you have had in the past where demand falls off, and line workers are laid off. I'm just getting a different vibe than past layoffs. Am I over-reading into this, or is there something more to be discussed here?

Craig D. Gates: And Craig this sounds a little bit different than layoffs that you have had in the past where demand falls off and and in line workers are are laid off.

Bill Dezellem: I'm, just getting a different vibe than than than historical layoffs.

Bill Dezellem: And my overriding into this or is there something something more to be discussed here.

Craig: There's a lot more to be discussed because.

Craig D. Gates: There's a lot more to be discussed because... These layoffs represent a significant strategic change in how we view Mexico vs. America vs. China vs. Vietnam. I tried to get at it in my prepared remarks, but Actually, the way I think about it is a little bit simpler, I think, in the flowered way we put it.

Craig D. Gates: These layoffs represent a significant strategic change.

Craig D. Gates: How we view.

Craig D. Gates: Mexico versus America versus China versus Vietnam.

Craig D. Gates: We tried to get at it in my prepared remarks.

Craig D. Gates: But.

Craig D. Gates: Actually the way I think about it is a little bit more simpler.

Craig D. Gates: Crude I think there's a flowered way we put it.

Craig D. Gates: Yeah.

Craig D. Gates: That is in the past.

Craig D. Gates: Year six months to a year.

Craig D. Gates: That is, in the past year, six months to a year, there's been a sea change in the average makeup of the customers who are interested in Mexico. So take this as we're clear that this is the average; it's not every customer. But what's happened is that the people who wanted to be in China but are not being allowed to do so by a management edict are now making up a significant portion of the folks that are interested in war ads. So those people were either in China or were headed to China, and they were going. China, driven mainly by cost.

Craig D. Gates: Been a sea change in.

Craig D. Gates: The average makeup of the customers who are interested in Mexico.

Craig D. Gates: I'll take this as were clear that this is the average it's not every customer.

Craig D. Gates: But what's happened is that the people who wanted to be in China.

Craig D. Gates: But are not being allowed to do so by a management edict.

Craig D. Gates: Are now making up.

Craig D. Gates: A significant portion of the folks that are interested in whereas the.

Craig D. Gates: So those people.

Craig D. Gates: We're either in China, or we're headed to China and they were going.

Craig D. Gates: China.

Craig D. Gates: Driven mainly by cost.

Craig D. Gates: And we're willing to accept a lack of flexibility in moving orders eight it out.

Craig D. Gates: And we're willing to accept a lack of flexibility in moving orders in and out; a lack of ability to send their engineers into the factory in the short term; a lack of ability to get their parts here in a week rather than a month and a half.

Craig D. Gates: Lack of ability to send their engineers into the factory in short term.

Craig D. Gates: Lack of ability to get their parts here in a week rather than most of the half.

Craig D. Gates: Lack of ability to do business in English versus the mix. So they had come to us have become used to all of that or were ready to endure all that.

Craig D. Gates: So they had become used to all that, or were ready to endure all that, in return for the lowest possible price they could get. A lot of those people are being told it's too risky, you are not going to go to China, figure something else out. So they end up knocking on our door.

Craig D. Gates: In return for the lowest possible price they could get.

Craig D. Gates: Those a lot of those people are being told it's too risky you are not going to go to China figure something else out.

Craig D. Gates: So they ended up knocking on our door.

Craig D. Gates: But they had sticker shock when they saw the costs that we were proposing out of rewards plant because there were as planned was configured for.

Craig D. Gates: But they had sticker shock when they saw the cost that we were proposing out of our Juarez plant because our Juarez plant was configured for a different set of people. And those set of people were the ones who didn't want to go to China, knew that they couldn't live with all the disadvantages I just listed, and were willing to pay a little more to be in Mexico and enjoy all the near shore advantages Mexico has to offer.

Craig D. Gates: A different set of people.

Craig D. Gates: And those set of people were the ones, who didn't want to go to China.

Craig D. Gates: New that they couldn't live with.

Craig D. Gates: All the disadvantages I, just listed and we're willing to pay a little more.

Craig D. Gates: To be in Mexico, and enjoy all of the near shore advantages Mexico has to offer.

Craig D. Gates: Well those people used to make up the majority of our.

Craig D. Gates: So those people used to make up the majority of our available market share. Now, the majority of our available market share, on average, is made up by the people on the other side of the family who want to be in China but are not being allowed to go there. Well, that means that all of the overhead in our factory in Mexico, the people in charge, the quality technicians, the engineers, the... Folks who worked in scheduling and on the plant for material handlers, program managers, all those people that we had built up over the years to provide U.S.-based service levels, but at a cost. We're not willing to be paid for by this new set of customers. And so.

Craig D. Gates: [noise] available market share.

Craig D. Gates: Now the majority of our available market share at average is made up by the people on the other side of the fence.

Craig D. Gates: What would be in China, but are not being allowed to go there.

Craig D. Gates: Well that means that all of the overhead in our factory in Mexico people overhead.

Craig D. Gates: The quality technicians the engineers the.

Craig D. Gates: Folks who worked in scheduling and on the plant for material handlers.

Craig D. Gates:

Craig D. Gates: Program managers.

Craig D. Gates: All of those people that we had built up over the years to provide.

Craig D. Gates: U S based service levels.

Craig D. Gates: But at a cost.

Craig D. Gates: We're not willing to be.

Craig D. Gates: Paid for by this new set of customers.

Craig D. Gates: So.

Craig D. Gates: Those are the folks that made up the majority of this layoff, which has never happened before in our history. So those people are long-term employees of Keytronic. The wage structure and laws of Mexico require a significant severance payoff for folks in that category. And you're exactly right; this is nowhere near the normal type of layoff. But it strategically positions the Mexican facility to compete and win, as we've seen in the last six months, a new breed of customer that represents a very big available market. So that's why it took longer than normal. That's why the severance was much higher than normal, and that's why you're sensing that it was different than normal.

Craig D. Gates: Those are the folks that made up a majority of this layoff, which has never happened before our history.

Craig D. Gates: So those folks are long term employees of key tronic.

Craig D. Gates: The.

Craig D. Gates: Wage structure and laws of Mexico would require a significant.

Craig D. Gates: Severance pay off.

Craig D. Gates: Folks in that category.

Craig D. Gates: Yeah.

Craig D. Gates: And you're exactly right. This is.

Craig D. Gates: Nowhere near the normal type of lay off.

Craig D. Gates: But it strategically positions.

Craig D. Gates: The Mexican facility.

Craig D. Gates: To compete and win as we've seen in the last six months.

Craig D. Gates: A new breed of customer that represents a very big available market.

Craig D. Gates: So that's why it took longer than normal that's why the severance was much higher than normal.

Craig D. Gates: And that's why you're sensing that it was different than normal.

Bill Dezellem: That's really insightful. Thank you, Craig.

Speaker Change: That's a that's really insightful, thank you Craig and and so.

Bill Dezellem: Because these are not your standard line workers that you'll bring back with higher production rates, your cost structure is permanently being lowered, then is what you're saying. Does it somehow also affect the capacity of the facility? And not necessarily the layoffs, Craig, but the restructuring to have essentially less flexibility. That sounds to me like you'll have more hours of lines up and running and less time with the customer, noodling over whether they ought to do something a little different or whatever. Is that a correct interpretation or not? Yes, it is.

Bill Dezellem: These because these are not your standard line workers that you'll bring back.

Bill Dezellem: With higher production rates.

Bill Dezellem: Your cost structure is permanently being lowered then is what you're saying.

Bill Dezellem: Yes.

Bill Dezellem: Does it somehow also affect the capacity of this facility and I'm not not necessarily the layoffs, Craig, but but the restructuring too.

Bill Dezellem: We have essentially less flexibility that sounds to me like you'll have more hours of lines up and running.

Bill Dezellem: And in less time.

Bill Dezellem: Down with a customer noodling over you know, whether they ought to do something a little different or or or whatever it is that a correct interpretation or we're not.

Craig: It is and in fact, we have.

Craig D. Gates: It is, and in fact, we have pruned a very small number of customers who no longer fit into the model that you just described. So it will result in More product being made with fewer line workers because every time you have to shut down a line and change it over, not only do you have to have a bunch of engineers and quality folks and material handlers out there swapping lines, but inevitably, you couldn't time it perfectly, so you had line workers who were milling around waiting for some part or some process to come up the way it should.

Craig D. Gates:

Craig D. Gates: <unk>.

Craig D. Gates: It's a very small number of customers who no longer fit into the model that you just described.

Craig D. Gates: So it will result in.

Craig D. Gates: More product being made with less line workers. Because every time you have to shut the line down and change it over not only did you have to have a bunch of engineers and quality folks in material handlers.

Craig D. Gates: They're swapping line over inevitably you couldn't time it perfectly. So you had line workers, who were milling around waiting for some part or some process.

Craig D. Gates: They come up the way it should.

Craig D. Gates: So it's going to turn much more into a, bang bang, slapping parts together. And I don't want to say that in a low quality news way, but it's going to be a lot more of just run something at high volume than it is switch over every 10 minutes because the customer called up, and it's freaky.

Craig D. Gates: So it's gonna turned much more into a.

Craig D. Gates: Bang Bang slap and parts together and I don't want to say that in the low quality means, but it's going to be a lot more of just run something at high volume then it is switch over every 10 minutes because the customer calls up and it's freaking out.

Speaker Change: Okay. That's helpful and then.

Craig D. Gates: And that's how the Lord... I'm sorry; go ahead.

Craig D. Gates: I'm sorry go ahead.

Craig D. Gates: That type of work is migrating back to the states because people are willing to pay even more to get that level of service than they had been in the past.

Craig D. Gates: All of that work is migrating back to the states because people are willing to pay even more to get that level of service than they have in the past.

Speaker Change: Fascinating okay. Thank you and.

Bill Dezellem: Fascinating. Okay, thank you. And then lastly, if we exclude the severance and the winter weather shutdown, then we're looking at 13 cents of earnings. That would have happened had you not had the one, intended event and then the weather that surprised you.

Bill Dezellem: And then lastly, if we exclude the sovereign.

Bill Dezellem: And the winter weather.

Bill Dezellem: Shut down then where we're looking at 13 cents of earnings just what would have happened had you not had.

Bill Dezellem: The one.

Bill Dezellem: Intended event and then the weather that surprised you.

Bill Dezellem: Yep.

Speaker Change: Okay, great well, thank you and I'll, let others ask additional questions, but thank you for all the time you have given.

Bill Dezellem: Great. Well, thank you, and I'll let others ask additional questions, but thank you for all the time you have given me on these conference calls to ask questions over the last maybe even 60 calls. So, thank you, I appreciate it, and Brett, we look forward to working with you more in the future.

Bill Dezellem: Given me on these conference calls to ask questions over and over the last maybe even 60 calls. So thank you appreciate it and we look forward to working more with you in the future.

Brett: Thank you Bill you're more than welcome and we've appreciated your insightful questions also.

Brett R. Larsen: Thank you, Bill. You're more than welcome, and we've appreciated your insightful questions also.

Speaker Change: Thank you.

Speaker Change: Once again, if you would like to ask an audio question. Please press star one to cancel this request. Please press star two.

Operator: Once again, if you would like to ask an audio question, please press star 1. To cancel this request, please press star 2. Your next question comes from the line of Bob Poole with Brick Alert Capital.

Robert Michael Poole: Our next question comes from the line of Bob Pool with <unk> capital.

Robert Michael Poole: Hi, guys.

Robert Michael Poole: Hi guys, um... So I'd like to apologize in advance because I'm going to ask some tough questions and make some tough comments, and I hope you'll understand that I think they need to be asked and the comments need to be made. But I do apologize in advance because this is usually a pretty friendly forum.

Robert Michael Poole: So I'd like to apologize in advance because I'm going to ask some tough questions and make some comments and and I hope Youll I think they need to be asked and they need to be made so.

Robert Michael Poole: But I do apologize in advance because it's usually a pretty friendly for them. So.

Robert Michael Poole: So first of all, I want to, you know, sort of wage a protest that the way you present your financial results is totally out of line with, you know, I follow hundreds of companies. And you're the only one who presents your results the way you do without making adjustments for things like severance and so forth and presenting your results and your guidance after things like severance. Nobody else does that.

Robert Michael Poole: First of all I want to you know sort of wage of protests that the way you present your financial result.

Robert Michael Poole: It's totally out of line with you know I follow hundreds of companies and you're the only one who presents your results. The way you do without making adjustments for things like severance and so forth and presenting your results and your and your guidance.

Robert Michael Poole: After things.

Robert Michael Poole: Things like severance nobody else does that and I don't think that there's any special pass to financial.

Robert Michael Poole: And I don't think that there's any special pass to financial, you know, heaven for being so puritanical in that presentation. Brett, you and I have discussed this a little bit. You know, how do you feel about this going forward?

Robert Michael Poole: Heaven for being so puritanical in that presentation.

Robert Michael Poole: Brett you and I've discussed this a little bit.

Brett: You know how do you feel about this going forward.

Brett: Your comments are noted next.

Brett R. Larsen: Your comments are noted.

Brett R. Larsen: Okay.

Robert Michael Poole: So, uh... The guidance is very hard to understand, and I'll tell you why.

Brett R. Larsen: So.

Robert Michael Poole: The guidance.

Robert Michael Poole: It's very hard to understand and I'll tell you why.

Robert Michael Poole: You're basically projecting flat revenues from the third quarter to the fourth quarter. And on 140 million dollars of revenues, you had a $575,000 loss in Q3. That included $3.7 million of Mexican severance. Uh, so that should not exist in the fourth quarter. You're taking out $10 million a year or $2.5 million per quarter in Mexican labor. That should not be there in the fourth quarter.

Robert Michael Poole: You have you're basically projecting flat revenues from the third quarter to the fourth quarter and on 140 million of revenues you had a $575000 loss in Q3.

Robert Michael Poole: Yeah.

Robert Michael Poole: That included $3 7 million of Mexican separately.

Robert Michael Poole: So that should not exist in the fourth quarter.

Robert Michael Poole: You're taking out 10 million, a year or two and a half million of per quarter and Mexican labor that should not be there in the fourth quarter.

Robert Michael Poole: Okay.

Robert Michael Poole: I think the impact of the peso is likely to be, you know, you've probably taken out half of your expenses in Mexico if the impact of the peso, assuming it stays around the same level. You know, there hasn't been a significant, you know, it seems to be pretty flat so far this quarter, you know, that should be 750 better in the fourth quarter, which, you know, should bring operating income to $6.4 million, $6,375,000. You know, taking into account the 1% increase in your bank spread, you know, that's probably about $1.2 million a year or $300,000 a quarter.

Robert Michael Poole: The impact of the peso is likely to be you know you've probably taken out half of your expenses in Mexico. The you know if the if the impact of the peso assuming it stays around the same level.

Robert Michael Poole: Yeah, there hasn't been a significant.

Robert Michael Poole: It seems to be pretty flat. So far this quarter, you know that that should be 750, <unk> better in the fourth quarter.

Robert Michael Poole: Which you know should bring you know if it's something else wasn't going on that would bring operating income to $6 4 million 60.375 million.

Robert Michael Poole: Now taking into taking into account that the.

Robert Michael Poole: The 1% increase in your Oh bank spread you know that.

Robert Michael Poole: Probably about a million to a year or 300000 of course that takes your interest from two weeks to three one.

Robert Michael Poole: So that keeps your interest from $2.8 million to $3.1 million. That brings your pre-tax income to $3.275 million. The 20% tax rate brings you to roughly $2.6 million in after-tax income on 10.8 million shares. That's $0.24 a share. You're talking about 3 to 10 cents a share. If I make the adjustment for the new information that Brett gave, about $500,000 to $1 million more in severance in the fourth quarter, if I take that out, that gets you to $0.19 a share. So what am I missing? What haven't you told us that is negative in the fourth quarter that accounts for the difference between $0.3 to $0.10 and $0.19?

Robert Michael Poole: Pre tax income to three to seven 520% tax rate Greenfields. They were roughly $2 6 million and after tax income of $10 8 million shares that's 24 cents a share.

Robert Michael Poole: You're talking about three to 10 cents a share.

Robert Michael Poole: If I if I make the adjustment for the new information that Brett gave about 500000 to a million more in separate in the fourth quarter. If I take that out that gets you to the 19 cents a share.

Robert Michael Poole: So what am I missing what what what haven't you told us that is a negative in the fourth quarter.

Robert Michael Poole: Where the difference between three to 10 cents and 19th.

Robert Michael Poole: Okay.

Speaker Change: Well, that's a lot of moving pieces I will let you know that.

Brett R. Larsen: Well, that's a lot of moving pieces. I will let you know that I don't know that I agree with all of your adjustments. Take them all in then, please Brett. Brett, you know, tell me where I'm wrong. Well, I'm not going to get into an argument here.

Brett: I don't know that I agree with all of your adjustments.

Brett R. Larsen:

Speaker Change: I expect to hey come on and then Brett.

Brett R. Larsen: Right.

Brett: I'm wrong.

Brett: Well, it's I'm not going to get into an argument here, it's not worth it but I will let you know that the peso recovery of 750000 is not accurate.

Brett R. Larsen: It's not worth it, but I will let you know that the peso recovery of $750,000 is not accurate. You know, and I'm also ensuring that the cost structure, the year's anticipating of the $10 million, that's not immediate that that is ramping over four quarters. So both of those, I think, are likely incorrectly calculated and are no additional material event are included in that projection of fourth-quarter results.

Brett R. Larsen:

Brett R. Larsen: I'm also ensuring that.

Brett R. Larsen: You know the cost structure of the year anticipating of the $10 million.

Brett R. Larsen: That's not immediate that that that is ramping over four quarters. So both of those I think are likely.

Brett R. Larsen: Incorrectly calculated.

Brett R. Larsen: And.

Brett R. Larsen: No additional material events.

Brett R. Larsen: Are included in that projection of fourth quarter results.

Brett R. Larsen: So can you explain why, if you've terminated all of these people, why you're not, and the savings in a year are $10 million, why is it not $2.5 million a quarter?

Speaker Change: So can you explain why if you've terminated all of these people why you're not and the and the savings into years 10 million why is it not $2 5 million a quarter.

Speaker Change: Because it's not we're not done with severance as we mentioned that we still have 500000 to a million dollars severance to occur in the fourth quarter.

Robert Michael Poole: because we're not done with severances. We mentioned that we still have $500,000 to $1,000,000 of severance payments to occur in the fourth quarter. Those have not been fully done, even as of today. And we also mentioned that it would take up to six months to fully recover that severance. So, you know, to be able to say that we're recovering two and a half million dollars of expenses in the fourth quarter, net of what we're paying in severance, it's just not accurate. So, actually...

Robert Michael Poole: Those have not been fully done even as of today.

Robert Michael Poole: And we also mentioned that that would take up to six months to fully recover that severance amount.

Robert Michael Poole: So.

Robert Michael Poole: To be able to say that that we're recovering two and a half million dollars of expenses in the fourth quarter.

Robert Michael Poole: Net of what we're paying and severance that there's just not accurate.

Speaker Change: So actually Brad if you go back $3 7 million in severance so far and let's say you pay another million. That's four seven that if youre going to get that back in six months, that's about two and a half a million a quarter Brett.

Robert Michael Poole: So actually, Brett, if you go back, you've paid $3.7 million in severance so far, and let's say you pay another million, that's $4.7 million. If you're going to get that back in six months, that's about $2.5 million.

Robert Michael Poole: Again.

Robert Michael Poole: I'm working with your number, Brett, so it's not like I'm making this stuff up, you know?

Robert Michael Poole: I'm working with your rent so it's not like I'm, making this up you know.

Robert Michael Poole: Bob, we're talking a few hundred thousand dollars of your 19 cents in our 10 cents.

Robert Michael Poole: Bob We're talking a few hundred thousand dollars of your 19, and our 10 cents.

Robert Michael Poole:

Robert Michael Poole: Sure.

Robert Michael Poole: You know, that's about a million, that's over a million dollars. That fourth quarter severance is still in process. Right, so yeah, so I've taken that out to get to the 19.

Bob: Oh, that's about that's over $1 million.

Robert Michael Poole: That fourth quarter severance is still in process.

Robert Michael Poole: Right. So yeah, so I've taken that out to get to the 19 cents.

Robert Michael Poole: I disagree as well with your effective tax rate. I think you need to go back and recalculate that, particularly coming off of a loss in the third quarter. You told us in your guide that 25%.

Speaker Change: I don't disagree as well with your effective tax rate I think you need to go back and recalculate that particularly coming off of a loss in third quarter.

Robert Michael Poole: You told it back in your guidance.

Robert Michael Poole: 25%.

Speaker Change: Okay is that with that is that with the.

Robert Michael Poole: Is that with the or is that with the?

Robert Michael Poole: Yeah, so you need to update your... your business outlook because it's at 20 percent, Brett. So, I'm working with your numbers. I mean, you guys have got to get this together. It's really bad.

Speaker Change: Yeah, So you need to update your.

Robert Michael Poole: Your business outlook, because it says 20% correct Brett.

Robert Michael Poole: Right.

Robert Michael Poole: So I'm working with your numbers I mean, you guys Gotta get this together, it's it's really bad.

Speaker Change: Okay <unk>.

Speaker Change: Next question.

Robert Michael Poole: You know, you're you're sort of talking about a strong backlog business coming back yet revenues really if you account for the fact that you lost 5 million of revenues last quarter that should have been $1 45 for the quarter and now you are projecting you know sort of $1 40 at the midpoint.

Robert Michael Poole: Okay, next question. You know, you're sort of talking about a strong backlog business coming back, yet revenues really, if you account for the fact that you lost 5 million in revenues last quarter, that should have been 145 for the quarter. And now you're projecting, you know, sort of 140 at the midpoint. Bill kind of asked this question, but it's hard to reconcile, you know, your comments about business getting better and having a strong backlog and, you know, another three to four percent decline in revenues. How do you reconcile that?

Robert Michael Poole: Bill kind of ask this question, but it's hard to reconcile.

Robert Michael Poole: So your comments about you know business are getting better and having a strong backlog and you know another 3% to 4% decline in revenues how do you reconcile those.

Robert Michael Poole: Well I think the words I used were muted.

Robert Michael Poole: I think the words I used were muted.

Robert Michael Poole: Well that that's.

Robert Michael Poole: Well, that's negative. That's really bad. That's not a muted benefit. You know, that's a muted decline. Well, as you said, Bob, this is

Robert Michael Poole: That's not that negative that's not muted benefit that that muted decline.

Speaker Change: Well as you said, Bob this is becoming unpleasant and I don't intend to argue with you.

Brett R. Larsen: Well, as you said, Bob, this is becoming unpleasant, and I don't intend to argue with you. Semantics of what we said, we're giving you a true representation of our belief in revenue going forward. We're giving you a true representation of the backlog we have, and we're giving you a true representation of the new customer pipeline we have, as well as new quotes. So.

Brett R. Larsen: Semantics of what we said, we're giving you a true representation of our belief of the revenue going forward.

Brett R. Larsen: Giving you a true representation of the backlog, we have and we're giving you a true representation of the new customer pipeline, we have as well with new quotes.

Brett R. Larsen: So.

Brett R. Larsen: That's that.

Brett R. Larsen: Thank you. The next question comes from the line of George Melas with MK H management. Please go ahead.

Operator: Thank you. Your next question comes from the line of George Melas with MKH Management. Please go ahead.

George Melas: Thank you.

Operator:

George Melas: Maybe just a question about the... and Billy Austin Dezellem, and Craig. You mentioned 10 million in state funds. When do you expect to get that $10 million in savings, and how much do you expect in the June quarter and in the quarters after that?

George Melas: Maybe just a question about the.

George Melas: They may opt out of it that way.

George Melas: And Craig you mentioned $10 million.

George Melas: When it when do you expect to get that $10 million.

George Melas: Savings.

George Melas: And how much do you expect in the June quarter and in the quarters after that.

Speaker Change: So the quarter, we're in right now we're going to get a portion of it and as we get into July August September we should be seeing most of it per quarter.

Craig D. Gates: So the quarter we're in right now, we're going to get a portion of it. And as we get into July, August, September, we should be seeing most of it.

Craig D. Gates: Okay. So does that mean that by September.

Craig D. Gates: Okay, so does that mean that by September you're at the full run rate of $10 million? Yep.

Craig D. Gates: The full run rate.

Craig D. Gates: Hum.

Craig D. Gates: Yep, that's correct. Yep, Oakley.

Speaker Change: Yes, that's correct yep.

Speaker Change: Okay great.

George Melas: Great, that's helpful. And roughly how much are you getting in two years?

Speaker Change: Great. That's helpful and what have you how much of a gaming in the June quarter.

George Melas: Okay.

Craig D. Gates: It is roughly between a million and a half and two million dollars. OK.

George Melas: It is roughly.

Craig D. Gates: Between a million and a half and $2 million.

Craig D. Gates: Okay.

Craig D. Gates: And why why is that is that because you said.

George Melas: And why is that? Is that because you've established the law, but you haven't... You can release everybody as of March 31st, is that what it is? That is correct.

George Melas: We've established a below one but no I haven't.

George Melas: <unk> been let go everybody as there's more students first is that what it is.

George Melas: That is correct.

George Melas: Okay.

Speaker Change: Very good.

George Melas: Okay. Very good. Now, a question that relates to what Bill was asking. Do you actually have any customers migrating from Mexico to the U.S.? Because as I look at...

George Melas: Well then the question that relates to relate to what Ben was asking.

George Melas: Do you actually have some customers migrating from legacy.

George Melas: Okay.

George Melas: They look at.

George Melas: If you do see your.

Craig D. Gates: If you are reducing your capability in Mexico, having sort of fewer people to handle the project, the customers that you still have there that have these expectations, how do you manage that? I mean, are we going to have a bifurcated service almost in Mexico? The legacy customers have a certain kind of expectation, and for the new customers, it's a different set of expectations.

Craig D. Gates: They need to.

Craig D. Gates: Mitch seafood.

Craig D. Gates: I mean.

Craig D. Gates: Sure.

Craig D. Gates: Where people to him.

Craig D. Gates: Good project.

Craig D. Gates: The customers that you still have there that's how these expectations. How do you manage that I mean are we going to have like a bifurcated service almost in Mexico. The legacy customers have a certain kind of.

Craig D. Gates: Expectations and for the new customers at two different set of expectations.

Craig D. Gates: Yeah, that's a very perceptive question. What we're moving from is a factory that was loaded with the overall ability to handle anything that happens to any customer at any time. And we're moving to a factory that is specifically loaded by customers to provide whatever services the customer decides that they would like to pay for. So it's almost impossible, at least we found it to be so, to control costs when you're peanut buttering them across the entire facility, or nine facilities. When you have specifically talked with existing and new customers about what it is you're looking for,

Speaker Change: Yeah, that's a very perceptive question.

Craig D. Gates: What we're moving from is a factory that was.

Craig D. Gates: Loaded with the overall ability to handle anything that happened to any customer at any time.

Craig D. Gates: And we're moving to a factory that is specifically loaded by customer to provide whatever services the customer decides that they would like to pay for.

Craig D. Gates: So it's almost impossible at least we found it to be so to control costs, when you're peanut buttering it over the entire facility or nine facilities.

Craig D. Gates: Yeah.

Craig D. Gates: When you ask specifically.

Craig D. Gates: And this is your base price. And if you want to be able to call us and switch back and forth in a day, we're going to have to add this much support labor. And if you're not willing to pay for it in Mexico, but you want it, then you probably ought to... go somewhere else, and if you do want to pay for it, maybe it makes more sense at the levels you think you're going to need to move to the States. We have seen examples of customers who have decided to move their production to one of our facilities.

Craig D. Gates: Talked with existing and new customers about what is it you're looking for.

Craig D. Gates: This is your base price.

Craig D. Gates: And if you want to be able to call us and switch back and forth and today, we're going to have to add this much support labor.

Craig D. Gates: And if you're not willing to pay for in Mexico, but you want. It then you probably ought to.

Craig D. Gates: Go somewhere else and if you do want to pay for it.

Craig D. Gates: Maybe it makes more sense.

Craig D. Gates: At the levels, you think youre going to need to move to the states.

Craig D. Gates: And so we have seen.

Craig D. Gates: Some customers, who have decided to move there.

Craig D. Gates: Two are one of our facilities in the states.

Craig D. Gates: So far as to Mexico.

Craig D. Gates: from Juarez to Mexico, so from Juarez to the U.S., Yep. Not a big deal.

Craig D. Gates: Huawei is a U S.

Craig D. Gates: Yep, not a large amount, but some.

Craig D. Gates: Yep.

Craig D. Gates: Not a large amount.

Craig D. Gates: Huh.

Craig D. Gates: Okay.

Speaker Change: Yeah, I'm always confused about how you run a plant like this or 90 day Assembly. Please.

George Melas: Yeah, I'm just confused about how you run a plan like this, or nine facilities with different sets of expectations among different customers. And, in a way, I sort of love the fact that we were sort of like a real differentiation in designing, handling difficult jobs that were sticky. But it seems that these new customers are not really that. They're pretty commodity oriented. Well, um...

George Melas: Okay.

George Melas: So different set of expectations among different customers and in a way I I sort of loved.

George Melas: The fact that we were sort of lately.

George Melas: The real differentiation.

George Melas: Handling difficult jobs.

George Melas: But then we're sticky.

George Melas: But it seems that these new customers.

George Melas: He is not really that big.

George Melas: Pretty commodity oriented guy.

George Melas: Well.

Speaker Change: Well, maybe I missed it.

Craig D. Gates: Thank you very much, and good night, a portion of our thinking. Okay. So we talk about design capabilities with Difficult Designs and Difficult Products that make those products stick. Those designs and those processes come out of the engineering staff in Spokane. The ability to make poorly designed or dodgy products that Keytronic didn't design that we just transferred. That has to come out of the folks in Juarez.

Speaker Change: Got you.

Craig D. Gates: Oh, no. It's a really good question and I wanted to make sure we're perfectly clear on it because it's a very key strategic.

Craig D. Gates: A portion of our thinking.

Craig D. Gates: Hum.

Craig D. Gates: Okay.

Craig D. Gates: So we talk about design capabilities.

Craig D. Gates: With difficult designs and difficult products.

Craig D. Gates: That make those products sticky.

Craig D. Gates: Those designs and those processes.

Craig D. Gates: Come out of the engineering staff in Spokane.

Craig D. Gates: The.

Craig D. Gates: The ability to.

Craig D. Gates: Manage.

Craig D. Gates: A poorly designed or dodgy product that key tronic didn't design.

Craig D. Gates: That we just transferred.

Craig D. Gates: That has to come out of the folks in Juarez.

Craig D. Gates: So.

Craig D. Gates: So... When we cut our ability to provide service on a peanut butter level, That means that if a customer wants to transfer to us a product that has a dodgy process, we now up front say, yeah, we don't. We don't want to call your baby ugly, but your baby's kind of ugly. And we realize that you have quotes from other suppliers that are lower than our quote, and we are happy to give you a quote that would be dirt floor levels of engineering support, but you're not going to succeed building this product with this design in a factory without engineering services.

Craig D. Gates: When we cut our ability to provide service on a peanut butter.

Craig D. Gates: Level.

Craig D. Gates: That means that if a customer wants to transfer to us a product that has a dodgy process.

Craig D. Gates: We know upfront say, yeah, we don't we don't want to call your baby ugly, but your baby's kind of ugly.

Craig D. Gates: And you realize that you have quotes from other suppliers that are lower than.

Craig D. Gates: Our quote and we're happy to give you a quote that would be dirt slower levels of engineering support.

Craig D. Gates: But yeah.

Craig D. Gates: You're not going to succeed building this product with this design in a factory without engineering services. So we're either going to have to agree that our price is going to be higher.

Craig D. Gates: So we're either going to have to agree that our price is going to be... higher than what you're hoping for. Well, we're going to have to help you change the design, or you're going to have to go somewhere else with this product.

Craig D. Gates: Higher than what Youre, hoping for.

Craig D. Gates: Well, we're gonna have to help you change the design.

Craig D. Gates: Or are you going to have to go somewhere else with this product.

Craig D. Gates: So that's.

George Melas: I don't know if that helps you, but that's a little bit of insight into how we're doing it. And then, secondly, with customers that have said, Yeah, we want this level of service. It's much easier to control the cost since we already have a lot of practice in creating miniature factories within factories. But we have... a little factory inside a big factory that we can say, all right, we're going to put one or two people on the support for this department, and they're not just on the overall salary supporting the whole company whenever a problem comes up.

Speaker Change: I don't know if that helps you.

George Melas: But that's a little bit of insight to how we're doing it.

George Melas: And then secondly.

George Melas: With customers that have said, yes, we want we want this level of service.

George Melas: It's much easier to control the cost since we already have a lot of practice and creating miniature factories within factories.

George Melas: So we have.

George Melas: A little factory inside a big factory that we can say all right we're going to put.

George Melas: One or two people.

George Melas: On the support for this department.

George Melas: And they're not they're not just on the overall salary supporting the whole company whenever a problem comes up they're only going to be full time on this department building. This product for this customer because this customer is paying for it.

George Melas: They're only going to be full time in this department building this product for this customer because this customer is paying for it. So it's much easier to control the cost and much easier to calculate the cost when you've got it, basically laser-focused on a product and a customer rather than smeared across the overall strategic intent of being high service for everybody. So we haven't lost the ability to market ourselves as a high service supplier out of Boris.

George Melas: Well, it's much easier to control the cost and much easier to calculate the cost.

George Melas: When you've got it.

George Melas: Basically laser pointed onto a product and a customer rather than smeared across.

George Melas: Overall strategic intent of being high service for everybody.

George Melas: So we haven't lost the ability to market ourselves.

George Melas: As a high service supplier.

George Melas: What we've changed is our ability to provide a low service cost for those people who want it. So it's kind of like this. One of the few things I took away from business school was if you can't be niche, you have to be low cost. So we now have the ability, if we are not niche by virtue of design or service levels, to be low cost out of Juarez by clearly defining to the customer up front that if you're going to want this, it's going to cost this. Does that make sense?

George Melas: Out of warheads, what we've changed is our ability to provide.

George Melas: A low service costs for those people who want it.

George Melas: So it's kind of like.

George Melas: One of the few things I took away from business School is if you can't be niche you have to be low cost.

George Melas: So we now have the ability if we are not niche by virtue of design of service levels to be low cost out of war S by clearly defining to the customer.

George Melas: Upfront that if you're going to want this it's going to cost this.

George Melas: Does that make sense.

Craig D. Gates: It does make sense. It's an interesting thing to manage. Let me ask a question there that's related to that. Does that mean that the conversation that you have with your customer is meaningfully different than it was before? It's almost like you're proposing alternatives for them, and they can choose from that, but you didn't really do that again before.

Speaker Change: It doesn't make sense, it's an interesting thing to manage.

Speaker Change: Yes, good question, David that's related to that.

Craig D. Gates: Does that mean that the.

Craig D. Gates: The conversation.

Craig D. Gates: With your customers.

Craig D. Gates: Is meaningfully different than it was before.

Craig D. Gates: Yeah, it's almost like you proposed.

Craig D. Gates: Yeah.

Craig D. Gates: Alternatives for them and they can choose from or that you didn't do that before.

Craig D. Gates: We didn't have the opportunity to say, if you want to come to Juarez and be a low-cost, low-service customer, Here is your new price because we didn't have the capability of removing all of that peanut butter overhead from our cost structure on a given quote, and... Even if you could do that.

Craig D. Gates: We did.

Craig D. Gates: We didn't have the opportunity to say, if you want to come to Juarez and be a low cost low service customer.

Craig D. Gates: Here is your new price because we didn't have the capability of removing all of that.

Craig D. Gates: Peanut buttered.

Craig D. Gates: Overhead yep.

Craig D. Gates: From our cost structure on a given quote.

Craig D. Gates: And.

Craig D. Gates: Even if he could do that.

Craig D. Gates: It takes a while to figure out on a given product what that cost should be if you're trying to come up with a new formula. And if you can't do that quickly, it's hard to convince a customer that you actually are going to have that ability to give them what they want. Very, very low cost.

Craig D. Gates:

Craig D. Gates: Makes a while to figure out on a given product what that costs should be if.

Craig D. Gates: If you're trying to come up with a new formula.

Craig D. Gates: And if you can't do that quickly it's hard to convince a customer that you actually are going to have that ability to give them what they want.

Craig D. Gates: Very very low cost low service.

Craig D. Gates: So, we have, right now, almost 80 active quotes. And people want two to three weeks of response time on a quote. And if you're trying to recalculate your cost structure every time you get a weird product, you can't do it quick enough. It's much easier to add than it is to try to find a way to subtract.

Craig D. Gates: So where have we.

Craig D. Gates: We have right now.

Craig D. Gates: Almost 80 active quotes.

Craig D. Gates: And people what two to three weeks of response time on a quote.

Craig D. Gates: And if you're trying to recalculate your cost structure every time, you get a weird product you can't do it quick enough.

Craig D. Gates: Much easier to add than it is to try and find a way to subtract.

Craig D. Gates:

Craig D. Gates: Okay.

Craig D. Gates: And if you look at your customers now in Juarez, they are mostly niche, they're mostly high service customers. The low cost is still a very small group, but you think that's where the growth will come.

Craig D. Gates: And if you looked at your customers know inquiries. They are mostly didn't stay mostly either high service.

Craig D. Gates: Customers the low cost is still a very small group.

Craig D. Gates: Do you think that's where the growth will come.

Craig D. Gates: No.

Craig D. Gates: No, that's not true. It's a mix.

Speaker Change: That's not true it's a mix.

Craig D. Gates: Okay, part of the part of the revelation is that this is because we were being forced by the wage rates and the peso to raise prices across the board on customers. We realized that the low service customers were going to bolt. And as we struggle to figure out how we could keep those customers in the face of these wage and peso problems. That was part of our revelation that, okay, wait a minute, we're in a different market now.

Craig D. Gates: Okay part of the part of the revelation is on this is that as we were being forced by the wage rates in the peso.

Craig D. Gates: And we're being forced to raise prices across the board on customers.

Craig D. Gates: Realized that the low service customers were going to bolt.

Craig D. Gates: And as we struggled to figure out how we could keep those customers in the face of these wage in peso problems that.

Craig D. Gates: That was part of our revelation, Okay wait a minute we're in a different market now.

Speaker Change: Got it okay.

George Melas: I had one more question. In a way, if we look back two years ago, this would have come to you guys a little bit as a surprise. But I guess it was forced upon you, as you said, partly by the wage rates and the peso, and then accelerated by... the demand of some of the

George Melas: Steve.

George Melas:

Speaker Change: And one more question, let me see.

George Melas:

George Melas: But anyway, if we look back two years ago. This would have come to you guys.

George Melas: As a surprise, but I guess it was forced upon you as you said put despite the wage rates in the peso.

George Melas: And then accelerated by.

Speaker Change: Hey, there.

George Melas: The demand of similar to <unk>.

George Melas: The people who are operating in China.

George Melas: It's actually.

Craig D. Gates: It actually goes back four years to the beginning of COVID and the gradual and accelerating end to the answer every single procurement agent we spoke with to the question of where I should be, the answer was China. As COVID and Trump and China and the state, and tariffs and the supply chain. And all of that is added together, and I'm not sure the general public knows this, but it used to.

George Melas: It goes back for years to the beginning of Covid.

Craig D. Gates: And the gradual and accelerating and two the answer every every every single procurement agent. We spoke with two of the question of where should I be the answer was China.

Craig D. Gates: And.

Craig D. Gates: As Covid and Trump.

Craig D. Gates: And China in the states.

Craig D. Gates: And tariffs and supply chain.

Craig D. Gates: And all of that is added together.

Craig D. Gates: And I'm not I'm not sure the general public knows this but it used to be.

Craig D. Gates: 100% in fashion call, if you've got a bunch of OEM Ceos together five years ago. It would be almost embarrassing for them to say they were building anywhere, but China. They would be asked what are you thinking the board would be asking them. What are you thinking why are you why are you not in China.

Craig D. Gates: A 100% fashion call. If you got a bunch of OEM CEOs together five years ago, it would have been almost embarrassing for them to say they were building anywhere but China. They would have been asked, "What are you thinking?" Their board would have asked them, "What are you thinking?"

Craig D. Gates: That has changed dramatically now as a result of all of those.

Craig D. Gates: Why are you not in China? That has changed dramatically now as a result of all those economic, political, and physical events that have happened in the last four years, so that the market we're operating in is dramatically different than the one we were in five years ago, four years ago. And that's why we were doing what we were doing five years ago, and that's why we're changing what we're doing now.

Craig D. Gates: Economic and political and physical events that have happened in the last four years.

Craig D. Gates: So that's the market we're operating in.

Craig D. Gates: Is dramatically different than the one we were in five years ago four years ago.

Craig D. Gates: And that's why.

Craig D. Gates: We were doing what were doing five years ago, and that's why we're changing what we're doing now.

Speaker Change: Okay, Great and then maybe a couple more questions.

George Melas: Okay, great. And then maybe a couple more questions from a gross margin perspective, and I think the idea is to try to get back to a 9% gross margin or maybe even higher. Is that still a possibility, or is that actually some sort of new strategy?

George Melas: On a gross margin perspective.

George Melas: Is and I think the idea is to try to get back to a 9% gross margin or maybe even hernia.

George Melas: Is that still a possibility or does that sort of new strategy actually.

Speaker Change: You know it appears that.

George Melas: I think it's still a possibility I don't think the strategy impairs it.

Craig D. Gates: I think it's still a possibility. I don't think the strategy impairs it. And I think the ability to build more, build more faster with less people. His health is a help rather than a hindrance to that.

Craig D. Gates: And I think our I.

Craig D. Gates: I think the ability to build more deals more faster with less people.

Craig D. Gates: These health is a help rather than a hindrance to that.

Craig D. Gates: Okay.

Speaker Change: Okay great.

George Melas: It will be great. Craig, thank you very much for everything, for your time, for your answers.

Speaker Change: Greg. Thank you very much for everything but your time for your answers.

George Melas: And you're not going away, so I'm happy about that. And Brett and Tony, best of luck with everything. We have many more conversations. Thanks, George. It's been good knowing you.

Speaker Change: Uh huh.

George Melas: They're not going away, so I'm happy about that and Brad and Tony.

George Melas: With everything.

Speaker Change: We've got many more things.

George Melas: Yeah.

Craig D. Gates: Thanks George, it's been good knowing you.

Speaker Change: Thanks, George it's been good don't yet.

Speaker Change: Thank you.

Craig D. Gates: Yep.

Speaker Change: Thank you.

Operator: Thank you. Your next question comes from the line of Bill Dezellem with Titan Capital. Go ahead. I actually have.

Craig D. Gates: Next question comes from the line of Bill does Allen with Titan capital.

Bill Dezellem: Please go ahead Sir.

Bill Dezellem: I actually have a follow-up relative to something that I believe, Craig, you said in one of your remarks, that By structuring Juarez to be lower cost, you're opening yourselves up to a much larger market. Number one, did I hear that correctly? And then secondarily, by default, also structuring the U.S. maybe to be more of that high-touch in a more... Maybe a more obvious way, I know it's been that all along, but maybe a more obvious way, is that in any way expanding your potential market?

Bill Dezellem: Actually I have a follow up relative to something that I.

Bill Dezellem: I believe Craig you said in one of your remarks that.

Bill Dezellem: Bye.

Bill Dezellem: Structuring, whereas to be lower cost, you're opening yourselves up to a much larger market.

Bill Dezellem: Number one did I hear that correctly, and then secondarily bye.

Bill Dezellem: By default also structuring the.

Bill Dezellem: The U S and maybe to be more of that high touch N a N a more.

Bill Dezellem: Maybe a more obvious way I mean, I know, it's been that all along but maybe a more obvious way is that in any way.

Bill Dezellem: Expanding your your potential market.

Bill Dezellem: I don't think that changes to the U S based facilities or any more obvious than they have been in the past they were structured to be.

Craig D. Gates: I don't think the changes to the U.S.-based facilities are any more obvious than they have been in the past. They were structured to be high service at a price. The changes to Juarez, that flow through and result in bids and quoting being lower than what they used to be, is a change that results in a bigger available market to us.

Craig D. Gates: High service.

Craig D. Gates: At a price.

Craig D. Gates: The changes to whereas.

Craig D. Gates: Yeah.

Craig D. Gates: Slow through and result in.

Craig D. Gates: Bids and quoting being lower than what they used to be.

Craig D. Gates: Is it changed that results in a bigger available market to us.

Speaker Change: Do you have a quantification on that.

Bill Dezellem: Do you have any quantification on that? No. And then one additional question, please. You mentioned you have 80 quotes today. How does that compare to what we would have seen over the course of the last couple of years?

Craig D. Gates: It's much higher.

Bill Dezellem: No.

Craig D. Gates: And then one additional question. Please you mentioned do you have 80 quote today.

Craig D. Gates: Does that compare to what we would have seen over the course of the last couple of years.

Craig D. Gates: Oh, it's much higher.

Craig D. Gates: By a factor of.

Bill Dezellem: by a factor of... or 5%?

Bill Dezellem: Two or five or 5%.

Speaker Change: Oh, no, it's probably a factor of.

Craig D. Gates: Oh no, it's probably a factor of. There were times where we had quotes of maybe 20 or 30 in the funnel.

Craig D. Gates: Oh, there are times, where we had quotes maybe 20 or 30 in the funnel.

Craig D. Gates: So this is at least a at least double if not quadruple maybe what what you were accustomed to running at before.

Bill Dezellem: This is at least double, if not quadruple, maybe what you were accustomed to running at before. Well, congratulations, and I look forward to a few more of those at the up to $20 million mark.

Bill Dezellem: Yep.

Speaker Change: Great well, congratulations and Oh look forward to a few more of those that are they up to $20 million Mark.

Speaker Change: Us too.

Speaker Change: Enjoy your retirement.

Bill Dezellem: Thanks.

Bill Dezellem: This concludes today's question and answer session I will now turn the call back to Craig gates for any additional or closing remarks.

Craig D. Gates: This concludes today's question and answer session. I will now turn the call back to Craig Gates for any additional or closing remarks. Okay, thank you, everyone.

Craig D. Gates: Okay. Thank.

Craig D. Gates: Thank you everyone for participating in today's conference call. I'll speak for Brett and Tony when I say they look forward to speaking with you next quarter.

Craig D. Gates: Thank you everyone for participating in today's conference call.

Craig D. Gates: I'll speak for breath, and Tony you and I say, they look forward to speaking with you next quarter.

Craig D. Gates: Adios.

Operator: This concludes today's call. Thank you for your participation. You may now disconnect.

Speaker Change: This concludes today's call.

Music: ?? ?? ?? ??

Speaker Change: Thank you for your participation you may now disconnect.

Music: [music].