Q4 2024 Key Tronic Corp Earnings Call

Speaker Change: Thank you for standing by. You're currently on hold for the fourth quarter fiscal 2024 Keytronic Corporation conference call. At this time we are assembling today's audience and we plan to be underway shortly. We appreciate your patience. Please remain on the line.

Operator: [inaudible] William Dezellem, George Melas, Brett Larsen, George Melas, Brett Larsen, George Melas, George Melas, George Melas, George Melas, George Melas, George Melas, George Melas, George Melas, George Melas, George Melas, George Melas, George Melas, George Melas, George Melas, Thank you for joining us today and welcome to the fourth, 24th, Keytronic Corporation conference call. Today's conference is being recorded. At this time, I'm Good afternoon, everyone.

Speaker Change: Please stand by.

Speaker Change: Good day and welcome to the fourth 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 Tony Voorhees. Please go ahead sir.

Tony Voorhees: I am Tony Voorhees, Chief Financial Officer of Key Tron. I would like to thank everyone for joining us today on our investor conference call. Joining me here in our Spokane Valley headquarters is Brett Larsen, our President and Chief Executive Officer.

Tony Voorhees: Good afternoon, everyone. I am Tony Voorhees, Chief Financial Officer of Keytronic. I would like to thank everyone for joining us today on our investor conference call. Joining me here in our Spokane Valley headquarters is Brett Larsen, our President and Chief Executive Officer.

Tony Voorhees: As always, I would like to remind you that during the course of this call, we might make projections or other forward-looking statements regarding future events or the company's future financial performance. Please remember that such statements are only predictions. actual events or results may differ materially.

Speaker Change: 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.

Speaker Change: Please remember that such statements are only predictions. Actual events or results may differ materially.

Tony Voorhees: For more information, you may review the risk factors outlined in the documents the company has filed with the SEC, specifically our latest 10-K, quarterly 10-Qs, and 8-Ks. Please note that on this call, we will discuss historical, financial, and other statistical information regarding our business and operations. Some of this information is included in today's press release. During this call, we will also reference slides that accompany our discussion. The slides can be viewed during the webcast, and the link can be found on our investor relations website.

Speaker Change: For more information, you may review the risk factors outlined in the documents the company has filed with the SEC, specifically our latest 10-K, quarterly 10-Qs, and 8-Ks.

Tony Voorhees: In addition, the slides, together with the recorded version of this call, will be available on the Investor Relations section of our website. We will also discuss certain non-GAAP financial measures on this call. Additional information about these non-GAAP measures and reconciliations to the most directly comparable GAAP measures is provided in today's press release, which is posted on the Investor Relations section of our website.

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

standby. Today, and welcome to the fourth quarter fiscal 2024 Key Tronic Corporation conference call. Today's conference is being recorded.

Tony Voorhees: For the fourth quarter of fiscal year 2024, we reported total revenue of $126.7 million, compared to $162.6 million in the same period of fiscal year 2023. For the full year of fiscal 2024, total revenue was $559.4 million, compared to $588.1 million for the fiscal year 2023. Also, as previously disclosed, a cybersecurity incident caused disruptions and limited access to portions of our business applications, supporting operations and corporate functions at our Mexico and U.S. sites during the fourth quarter of fiscal 2024.

Speaker Change: Some of this information is included in today's press release. During this call, we will also reference slides that accompany our discussion. The slides can be viewed with the webcast, and the link can be found on our Investor Relations website.

Operator: At this time, I would like to turn the conference over to Tony Voorhees. Please go ahead, sir.

Tony Voorhees: Good afternoon, everyone. I am Tony Voorhees Chief Financial Officer of Key Tron. I would like to thank everyone for joining us today on our investor conference call. Joining me here in our Spokane Valley headquarters is Brett Larsen, our President and Chief Executive Officer. As always, I would like to remind you that during the course of this call, we might make projections or other forward looking statements regarding future events or the company's future financial performance.

Speaker Change: In addition, the slides, together with the recorded version of this call, will be available on the Investor Relations section of our website.

Tony Voorhees: Please remember that such statements are only predictions. Actually events or results may differ materially. For more information, you may review the risk factors outlined in the documents that company has filed with the SEC specifically, our latest 10K, quarterly 10Qs, and 8Ks. 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. During this call, we will also reference slides that accompany our discussion.

Speaker Change: We will also discuss certain non-GAAP financial measures on this call.

Speaker Change: Additional information about these non-gap measures and reconciliations to the most directly comparable gap measures are provided in today's press release, which is posted to the investor relations section of our website.

Tony Voorhees: During the disruption, we were unable to fulfill approximately $15 million of revenue during the fourth quarter of fiscal year 2024. Most of these orders are recoverable, and are expected to be fulfilled in fiscal year 2025. During the cyber disruption, we continued to pay wages in accordance with statutory requirements.

Speaker Change: For the fourth quarter of fiscal year 2024, we reported total revenue of $126.7 million.

Speaker Change: compared to $162.6 million in the same period of fiscal year 2023.

Speaker Change: For the full year of fiscal 2024, total revenue was $559.4 million compared to $588.1 million for the fiscal year 2023.

Tony Voorhees: We also deployed new IT-related infrastructure and engaged cybersecurity experts to remediate the incident. As a result, we incurred additional expenses of approximately $2.3 million. Partially offsetting the additional cybersecurity-related expenses was a favorable weakening of the Mexican peso late in the period, decreasing expenses by approximately $600,000. We also had an insurance game relating to a previously disclosed weather event at our Arkansas facility in the amount of approximately $700,000 during the fourth quarter of fiscal year 2024.

Tony Voorhees: The slides can be viewed with the webcast and the link can be found on our investor relations website. In addition, the slides together with the recorded version of this call will be available on the investor relations section of our website. We will also discuss certain non-gap financial measures on this call. Additional information about these non-gap measures and rec conciliations to the most directly comparable gap measures are provided in today's press release, which is posted to the investor relations section of our website.

Speaker Change: Also previously disclosed,

Speaker Change: A Cybersecurity Incident Caused Disruptions

Speaker Change: and limited access to portions of our business applications supporting operations and corporate functions at our Mexico and U.S. sites during the fourth quarter of fiscal 2024.

Speaker Change: During the disruption, we were unable to fulfill approximately $15 million of revenue during the fourth quarter of fiscal year 2024.

Speaker Change: Most of these orders are recoverable

Speaker Change: During the cyber disruption, we continued to pay wages in accordance with statutory requirements.

Tony Voorhees: For the fourth quarter of fiscal year 2024, we reported total revenue of $126.7 million, compared to $162.6 million in the same period of fiscal year 2023. For the full year of fiscal 2024, total revenue was $559.4 million, compared to $588.1 million for the fiscal year 2023. Also previously disclosed, a cyber security incident caused disruptions and limited access to portions of our business applications supporting operations and corporate functions at our Mexico and US sites during the fourth quarter of fiscal 2024.

Speaker Change: We also deployed new IT-related infrastructure and engaged cybersecurity experts to remediate the incident. As a result, we incurred additional expenses of approximately $2.3 million.

Speaker Change: Partially offsetting the additional cybersecurity-related expenses was a favorable weakening of the Mexican peso late in the period.

Tony Voorhees: During the disruption, we were unable to fulfill approximately $15 million of revenue during the fourth quarter of fiscal year 2024. Most of these orders are recoverable and are expected to be fulfilled in fiscal year 2025. During the cyber disruption, we continued to pay wages and accordance with statutory requirements. We also deployed new IT-related infrastructure and engaged cyber security experts to remediate the incident. As a result, we incurred additional expenses of approximately $2.3 dollars.

Speaker Change: Decreasing expenses by approximately $600,000.

Speaker Change: We also had an insurance gain relating to a previously disclosed weather event in our Arkansas facility in the amount of approximately $700,000 during the fourth quarter of fiscal year 2024.

Tony Voorhees: Despite the business disruption event, we improved our gross margin during Q4, primarily reflecting our workforce reductions in Mexico during the prior quarter and the weakening of the Mexican peso. Our gross margin was 9% and our operating margin was 2.2% for the fourth quarter of fiscal year 2024, compared to a gross margin of 8.5% and an operating margin of 2.6% in the same period of fiscal year 2023. Our net income was break-even for the fourth quarter of fiscal year 2024, compared to a net income of $1.1 million, or $0.10 per share, for the same period of fiscal year 2023.

Speaker Change: Despite the business disruption event, we improved our gross margin during Q4, primarily reflecting our workforce reductions in Mexico during the prior quarter and the weakening of the Mexican peso.

Speaker Change: Our gross margin was 9% and our operating margin was 2.2% for the fourth quarter of fiscal year 2024.

Speaker Change: compared to a gross margin of 8.5% and an operating margin of 2.6% in the same period of fiscal year 2023. Our net income was break-even for the fourth quarter of fiscal year 2024, compared to a net income of $1.1 million, or $0.10 per share, for the same period of fiscal year 2023. For the full year of fiscal year 2024, the net loss was approximately $800,000, or a net loss of $0.07 per share, compared to a net income of $5.2 million, or $0.47 per share, for fiscal year 2024.

Tony Voorhees: Partially offsetting the additional cybersecurity related expenses was a favorable weakening of the Mexican peso late in the period, decreasing expenses by approximately $600,000. We also had an insurance game relating to a previously disclosed weather event in our Arkansas facility in the amount of approximately $700,000 during the fourth quarter of fiscal year 2024. Despite the business disruption event, we improved our gross margin during Q4. Primarily reflecting our workforce reductions in Mexico during the prior quarter and the weakening of the Mexican peso.

Tony Voorhees: For the full year of fiscal year 2024, the net loss was approximately $800,000, or a net loss of $0.07 per share, compared to a net income of $5.2 million, or $0.47 per share, for fiscal year 2023. Excluding adjustments for certain income and expenses to measure our core results, adjusted net income was $1.1 million, or $0.10 per share, for the fourth quarter of fiscal year 2024, compared to adjusted net income of $1 million, or $0.09 per share, for the same period of fiscal year 2023. For the full year of fiscal year 2024, adjusted net income was $3.4 million, or $0.31 per share, compared to $2.2 million, or $0.20 per share, for fiscal year 2023.

Speaker Change: Excluding adjustments for certain income and expenses to measure our core results, adjusted net income was $1.1 million or $0.10 per share for the fourth quarter of fiscal year 2024 compared to adjusted net income of $1 million or $0.09 per share for the same period of the fiscal year 2023. For the full year of fiscal year 2024, adjusted net income was $3.4 million or $0.31 per share compared to $2.2 million or $0.20 per share for fiscal year 2024.

Tony Voorhees: Our gross margin was 9% and our operating margin was 2.2% for the fourth quarter of fiscal year 2024, compared to a gross margin of 8.5% and an operating margin of 2.6% in the same period of fiscal year 2023. Our net income was breakeven for the fourth quarter of fiscal year 2024, compared to net income of $1.1 million or 10 cents per share for the same period of fiscal year 2023. For the full year of fiscal year 2024, the net loss was approximately $800,000 or a net loss of $0.7 per share compared to net income of $5.2 million or $0.47 per share for fiscal year 2023.

Tony Voorhees: For more information on these non-GAAP measures, see the non-GAAP financial measures description and reconciliations in our earnings release. Turning to the balance sheet, we ended the fourth quarter of fiscal year 2024 by reducing inventory by approximately $29 million, or 21 percent, from the same time a year ago. These improvements in inventory levels primarily reflect increased component availability and our concerted effort to drive inventory reductions. We're pleased to see our inventory levels continue to become more in line with our current revenue. At the same time, the state of the worldwide supply chain still requires us to drive demand for parts differently than in historical periods.

Speaker Change: For more information on these non-GAAP measures, see the Non-GAAP Financial Measures Description and Reconciliations in our Earnings Release. Turning to the balance sheet, we ended the fourth quarter of fiscal year 2024 by reducing inventory by approximately $29 million, or 21 percent, from the same time a year ago. These improvements in inventory levels primarily reflect increased component availability and our concerted effort to drive inventory reductions. We're pleased to see our inventory levels continue to become more in line with our goals.

Tony Voorhees: Excluding adjustments for certain income and expenses to measure our core results, adjusted net income was $1.1 million or 10 cents per share for the fourth quarter of fiscal year 2024, compared to just adjusted net income of $1 million or 9 cents per share for the same period of fiscal year 2023. For the full year of fiscal year 2024, adjusted net income was $3.4 million or 31 cents per share compared to $2.2 million or 20 cents per share for fiscal year 2023.

Speaker Change: our current revenue. At the same time, the state of the worldwide supply chain still requires that we drive demand for parts differently than in historical periods. Our customers have revamped their forecasting methodologies, and we have significantly modified and improved our materials resource planning algorithms. 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 total liabilities by a combined amount of $56.1 million from a year ago.

Tony Voorhees: Our customers have revamped their forecasting methodologies, and we have significantly modified and improved our materials resource planning algorithms. 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 total liabilities by a combined amount of $56.1 million from a year ago. As a result, our current ratio was 2.8 to 1, up from 2.3 a year ago.

Tony Voorhees: For more information on these non-gap measures, see the non-gap financial measures, description, and reconciliations in our earnings release. Turning to the balance sheet, we ended the fourth quarter of fiscal year 2024 by reducing inventory by approximately $29 million or 21 percent from the same time a year ago. These improvements in inventory levels primarily reflect increased component availability and our concerted effort to drive inventory reductions. We're pleased to see our inventory levels continue to become more in line with our current revenue.

Speaker Change: Our current ratio was 2.8 to 1, up from 2.3 a year ago. At the same time, accounts receivable DSOs was at 98 days, compared to 85 days a year ago, which we believe reflects the back-end loaded nature of the quarter caused by the cyber event. Receivable capital expenditures were about $1.2 million for the fourth quarter of fiscal year 2024 and $5.2 million for the full year.

Tony Voorhees: At the same time, accounts receivable DSOs were at 98 days, compared to 85 days a year ago, which we believe reflects the back-end loaded nature of the quarter caused by the cyber event. Total capital expenditures were about $1.2 million for the fourth quarter of fiscal year 2024 and $5.2 million for the full year.

Tony Voorhees: At the same time, the state of the worldwide supply chain still requires that we drive demand for parts differently than in historical periods. Our customers have revamped their forecasting methodologies and we have significantly modified and improved our materials resource-playing algorithms. 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 total liabilities by a combined amount of $56.1 million from a year ago.

Tony Voorhees: 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 capability, using leasing facilities as well as make efficiency improvements to prepare for growth and add capacity, particularly in our U.S. and Vietnam locations. For the first quarter of fiscal year 2025, we're seeing a rebound among our legacy customers relative to the fourth quarter. For the first quarter of fiscal 2025, we expect to report revenue in the range of $140 to $150 million.

Speaker Change: 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.

Speaker Change: utilizing leasing facilities as well as make efficiency improvements to prepare for gross and ed capacity, particularly in our US and Vietnam locations.

Speaker Change: For the first quarter of fiscal year 2025, we're seeing a rebound among our legacy customers relative to our fourth quarter.

Tony Voorhees: Our current ratio was 2.81 up from 2.3 a year ago. At the same time, accounts receivable DSOs was at 98 days, compared to 85 days a year ago, which we believe reflects the back-end loaded nature of the quarter caused by the cyber event. Total capital expenditures were about $1.2 million for the fourth quarter of fiscal year 2024 and 5.2 million for the full year. 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.

Speaker Change: For the first quarter of fiscal 2025, we expect to report revenue in the range of $140 to $150 million.

Tony Voorhees: Moving into fiscal 2025, we are pleased to continue to see our new programs ramping up, cost efficiency improvements from our recent overhead reductions taking hold, and a significant weakening of the Mexican peso. Taking all these factors into consideration, we expect net income in the range of $0.10 to $0.20 per diluted share.

Speaker Change: Moving into fiscal 2025, we are pleased to continue to see our new programs ramping, cost efficiency improvements from our recent overhead reductions taking hold, and a significant weakening of the Mexican peso.

Speaker Change: Taking all these factors into consideration, we expect net income in the range of $0.10 to $0.20 per diluted share.

Tony Voorhees: We expect to see growth in our U.S. and Vietnam production. We have a strong pipeline of potential new business, and we are focused on improving our balance sheet. Over the longer term, we believe that we are increasingly well-positioned to win new programs and profitably expand our business. That's it for me, Brett.

Speaker Change: We expect to see growth in our U.S. and Vietnam production.

Speaker Change: We have a strong pipeline of potential new business and we are focused on improving our balance sheet over the longer term We believe that we are increasingly well positioned to win new programs and profitably expand our business

Tony Voorhees: Utilizing leasing facilities as well as making efficiency improvements to prepare for growth and end capacity, particularly in our U.S, and Vietnam locations. For the first quarter of fiscal year 2025, we're seeing a rebound among our legacy customers relative to our fourth quarter. For the first quarter of fiscal 2025, we expect to report revenue in the range of $140 to $150 million. Moving into fiscal 2025, we are pleased to continue to see our new programs ramping.

Brett Larsen: Thanks, Tony. Fiscal 2024 got off to a very promising start, though we faced some challenging headwinds. During the first half of the year, our revenue grew by 12% year over year, driven by increased production in our U.S. and Vietnam-based facilities. However, despite the strong top-line growth, our margins and profitability were negatively impacted by increased labor costs. Unfavorable foreign currency exchange rates in Mexico and higher interest rates. During the second half of fiscal 2024, we faced major disruptions to our business, including severe winter weather events that took our facilities in Mississippi and Arkansas offline for approximately two weeks in the third quarter, and then a cyber security event that interrupted our operations and corporate functions in Mexico and the U.S. during our most recent fourth quarter. Together, these events disrupted production for approximately six weeks during the year.

Speaker Change: That's it for me, Brett. Thanks, Tony. Fiscal 2024 got off to a very promising start, though we faced some challenging headwinds. During the first half of the year, our revenue grew by 12% year over year, driven by increased production in our U.S. and Vietnam-based facilities.

Speaker Change: Despite the strong top-line growth, our margins and profitability were negatively impacted by increased labor costs, unfavorable foreign currency exchange rates in Mexico, and higher interest rates.

Tony Voorhees: Cost efficiency improvements from our recent overhead reductions taking hold and a significant weakening of the Mexican peso. Taking all these factors into consideration, we expect net income in the range of $10 to $0.20 per diluted share. We expect to see growth in our U.S, and Vietnam production. We have a strong pipeline of potential new business and we are focused on improving our balance sheet. Over the longer term, we believe that we are increasingly well positioned to win new programs and profitably expand our business.

Speaker Change: During the second half of fiscal 2024, we faced major disruptions to our business, including severe winter weather events that took our facilities in Mississippi and Arkansas offline for approximately two weeks in the third quarter.

Speaker Change: and then the cybersecurity event that interrupted our operations and corporate functions in Mexico and the U.S. during our most recent fourth quarter. Together, these events disrupted production for approximately six weeks during the year.

Brett Larsen: Despite these disruptions, we took the necessary steps to reduce our workforce in Mexico, which is expected to save more than $10 million annually in labor costs. In coming quarters, we expect sales from Mexico-based production to recover due to recently won new programs, but we do not anticipate needing to increase our headcount in coming periods. Moving into fiscal year 2025, we're very pleased to see overall improvements in our operating efficiencies, as well as reduced inventory levels and other improvements made on the balance sheet.

Speaker Change: Despite these disruptions, we took the necessary steps to reduce our workforce in Mexico, which is expected to save more than $10 million annually in labor costs.

Brett Larsen: That's it for me, Brett.

Brett Larsen: Thanks Tony. Fiscal 2024 got off to a very promising start, though we faced some challenging headwinds. During the first half of the year, our revenue grew by 12% year over year, driven by increased production in our U.S, and Vietnam based facilities.

Speaker Change: In coming quarters, we expect sales from Mexico-based production to recover due to recently won new programs, but we do not anticipate needing to increase our headcount in coming periods.

Brett Larsen: Despite the strong top line growth, our margins and profitability were negatively impacted by increased labor costs, unfavorable foreign currency exchange rates in Mexico and higher interest rates. During the second half of fiscal 2024, we faced major disruptions to our business, including severe winter weather events that took our facilities in Mississippi and Arkansas, offline for approximately two weeks in the third quarter. And then the cybersecurity event that interrupted our operations and corporate functions in Mexico and the U.S, during our most recent fourth quarter.

Speaker Change: Moving into fiscal year 2025 we're very pleased to see overall improvements in our operating efficiencies as well as reduced inventory levels and other improvements made on the balance sheet.

Brett Larsen: During the year, we continue to expand our customer base, winning new programs involving security equipment, sporting goods, environmental solutions, security products, military aerospace, industrial control systems, energy management, telecommunications, consumer audio, industrial manufacturing, industrial moving equipment, industrial storage, medical devices, and consumer air filtration products. The strong pipeline of potential new business underscores the continued trend toward onshoring in a dual source and dual sourcing of contract manufacturing. Global logistics problems and the China-US geopolitical tension may continue to drive OEMs to re-examine their traditional outsourcing strategies.

Brett Larsen: Together, these events disrupted production for approximately six weeks during the year. Despite these disruptions, we took the necessary steps to reduce our workforce in Mexico, which is expected to save more than $10 million annually in labor costs. In coming quarters, we expect sales from Mexico-based production to recover due to recently one new programs, but we do not anticipate needing to increase our headcount in coming periods.

Speaker Change: During the year, we continue to expand our customer base.

Speaker Change: winning new programs involving security equipment.

Speaker Change: sporting goods, environmental solutions, security products, military aerospace.

Speaker Change: Industrial Control Systems, Energy Management, Telecommunications, Consumer Audio, Industrial Manufacturing, Industrial Moving Equipment, Industrial Storage, Medical Devices, and Consumer Air Filtration Products.

Speaker Change: The strong pipeline of potential new business underscores the continued trend towards on-shoring in a dual source and a dual sourcing of contract manufacturing.

Speaker Change: Global logistics problems and the China-U.S. geopolitical tension may continue to drive OEMs to re-examine their traditional outsourcing strategies.

Brett Larsen: We believe these customers increasingly realize that they have become overly dependent on their China-based contract manufacturers for not only product but also for design and logistics services. Over time, the decision to onshore or nearshore production is becoming more and more widely accepted as a smart, long-term strategy.

Brett Larsen: Moving into fiscal year 2025, we're very pleased to see overall improvements in our operating efficiencies, as well as reduced inventory levels and other improvements made on the balance sheet. During the year, we continue to expand our customer base, winning new programs involving security equipment, sporting goods, environmental solutions, security products, military aerospace, industrial control systems, energy management, telecommunications, consumer audio, industrial manufacturing, industrial moving equipment, industrial storage, medical devices, and consumer air filtration products.

Speaker Change: We believe these customers increasingly realize that they have become overly dependent on their China-based contract manufacturers for not only product, but also for design and logistics services.

Speaker Change: Over time, the decision to onshore or nearshore production is becoming more and more widely accepted as a smart long-term strategy.

Brett Larsen: 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 continued wage increases in Mexico. As it has become clear that these changes in the base cost of Mexican production are long-standing, we are right-sizing our operations in order to remain cost-competitive. It has also become clear that customers near-shoring from China may have a different calculus for selecting a geographic location for business.

Speaker Change: As a result, we see opportunities for growth, and those opportunities are becoming more clearly defined.

Speaker Change: At the same time, we are seeing a sustained trend of continued wage increases in Mexico.

Speaker Change: As it has become clear that these changes in the base cost of Mexican production are long standing, we are right-sizing our operations in order to remain cost competitive.

Brett Larsen: The strong pipeline of potential new business underscores the continued trend towards ensuring in a dual source and a dual sourcing of contract manufacturing. Global logistics problems and the China-U.S, geopolitical tension may continue to drive OEMs to re-examine their traditional outsourcing strategies. We believe these customers increasingly realize that they have become overly dependent on their China-based contract manufacturers for not only product, but also for design and logistics services. Over time, the decision to ensure or near-shore production is becoming more and more widely accepted as a smart long-term strategy.

Speaker Change: It has also become clear that customers nearshoring from China may have a different calculus for selecting a geographic location for business.

Brett Larsen: For those customers who struggle with Chinese production due to their flexibility requirements, we believe our U.S. sites offer the ultimate in flexibility, engineering support, and ease of communication. Over the past 12 months, revenue from our U.S. production facilities has increased approximately 7 percent. In the fourth quarter of 2024, production in the U.S. represented 29% of total revenue, up from 25% a year ago. Meanwhile, for those customers whose requirements have adapted to the Chinese model of limited flexibility, challenging communication, and less engineering support, we expect their Mexico facilities will remain the answer. Therefore, we are reconfiguring our Mexico sites to endeavor to be lower cost and provide more commodity-level service while still maintaining high quality.

Speaker Change: For those customers who struggle with China production due to their flexibility requirements, we believe our U.S. sites offer the ultimate in flexibility, engineering support, and ease of communications.

Speaker Change: Over the past 12 months, revenue from our U.S. production facilities has increased approximately 7%.

Speaker Change: In the fourth quarter of 2024, production in the U.S. represented 29 percent of total revenue, up from 25 percent a year ago.

Brett Larsen: 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 continued wage increases in Mexico. As it has become clear that these changes in the base cost of Mexican production are long-standing, we are right-sizing our operations in order to remain cost-competitive. It has also become clear that customers near-shoring from China may have a different calculus for selecting a geographic location for business.

Speaker Change: Meanwhile, for those for those customers whose requirements had adapted to the China model of limited flexibility, challenging communication,

Speaker Change: and less engineering support, we expect their Mexico facilities remain the answer.

Speaker Change: Therefore, we are reconfiguring our Mexico sites to endeavor to be a lower cost and provide more commodity level service while still maintaining high quality.

Brett Larsen: 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 the coming years, we expect our facility in Vietnam to play a major role in our growth. While China growth has slowed and many companies have decided to take risk mitigation steps with their Chinese manufacturers, the fact remains that many components must still 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.

Speaker Change: 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.

Brett Larsen: For those customers who struggle with China production due to their flexibility requirements, we believe our U.S, sites offer the ultimate inflexibility, engineering support, and ease of communications. Over the past 12 months, revenue from our U.S, production facilities has increased approximately 7%. In the fourth quarter of 2024, production in the U.S, represented 29% of total revenue up from 25% a year ago. Meanwhile, for those customers whose requirements had adapted to the China model of limited flexibility, challenging communications, and less engineering support, we expect there are Mexico facilities remaining the answer.

Speaker Change: In coming years, we expect our Vietnam facility to play a major role in our growth.

Speaker Change: While China growth has slowed and many companies have decided to take risk mitigation steps with their China manufacturers, the fact remains that many components must still be sourced from China.

Speaker Change: Our procurement group in Shanghai, which serves the entire corporation, remains important for managing the China component supply chain on an ongoing basis.

Brett Larsen: Additionally, our China production facility continues to be profitable and has found recent success in winning new programs with Chinese OEMs. 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 a program's specific design challenges makes that business extremely sticky.

Speaker Change: Additionally, our China production facility continues to be profitable and has found recent success in winning new programs with Chinese OEMs.

Brett Larsen: Therefore, we are reconfiguring our Mexico sites to endeavor to be a lower cost and provide more commodity-level service while still maintaining high quality. 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.

Speaker Change: The combination of our global footprint and our expansive design capabilities is proving to be extremely effective in capturing new business.

Speaker Change: Many of our large and medium-sized manufacturing program wins are predicated on Keytronics' deep and broad design services.

Speaker Change: And once we have completed a design and ramped it into production, we believe our knowledge of a program's specific design challenges makes that business extremely sticky.

Brett Larsen: In coming years, we expect our Vietnam facility to play a major role in our growth. While China growth has slowed, and many companies have decided to take risk mitigation steps with their China manufacturers, the fact remains that many components must still be sourced from China. Our procurement group in Shanghai, which serves the entire corporation, remains important for managing the China component supply chain on an ongoing basis. Additionally, our China production facility continues to be profitable and has found recent success in winning new programs with Chinese OEM.

Brett Larsen: 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 similar size. We believe that global logistics problems, China-U.S. political tensions, and the heightened concerns about supply chains will continue to drive the favorable trend of contract manufacturing returning to North America, as well as our expanding facilities in Vietnam.

Speaker Change: 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,

Speaker Change: high-volume automated assembly, and the design, construction, and operation of complicated test equipment.

Speaker Change: We believe this expertise will increasingly set us apart from our competitors of similar size.

Brett Larsen: 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 Key Tronics deep and broad design services. And once we have completed the design and ramped it into production, we believe our knowledge of a program specific design challenges makes that business extremely sticky. 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 similar size.

Speaker Change: We believe that the global logistics problems...

Speaker Change: China-U.S. political tensions and the heightened concerns about supply chains will continue to drive the favorable trend of contract manufacturing returning to North America as well as our expanding Vietnam facilities.

Brett Larsen: 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 second half of fiscal 2024, we move into fiscal 2025 with a strong pipeline of potential new business, and we're seeing significant improvements in our operating efficiencies and also a weakening peso. Moreover, we will continue to rebalance our manufacturing across our facilities in Mexico, the U.S., and Vietnam.

Speaker Change: 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.

Speaker Change: While the unfortunate combination of factors temporarily disrupted our growth and profitability in the second half of fiscal 2024, we move into fiscal 2025.

Speaker Change: With a strong pipeline of potential new business, and we're seeing significant improvements in our operating efficiencies and also a weakening peso.

Speaker Change: Moreover, we will continue to rebalance our manufacturing across our facilities in Mexico, the U.S. and Vietnam. We remain very encouraged by our progress and the potential for profitable growth over the long term.

Brett Larsen: We remain very encouraged by our progress and the potential for profitable growth over the long term. In closing, I want to emphasize that the execution of our strategy was only made possible by our investments in plants and equipment but, even more so, the skills, local knowledge, and talents of our people. I want to thank our exceptional employees for their dedication and hard work during this past year and our shareholders for their continued support.

Brett Larsen: We believe that the global logistics problems, China U.S, political tensions and the heightened concerns about supply chains will continue to drive the favorable trend of contract manufacturing returning to North America, as well as our expanding Vietnam facilities. 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.

Speaker Change: In closing, I want to emphasize the execution of our strategy was only made possible by our investments in plants and equipment, but even more so, the skills, local knowledge and talents of our people.

Speaker Change: I want to thank our exceptional employees for their dedication and hard work during this past year, and our shareholders for their continued support.

Operator: This concludes the formal presentation. Tony and I will now be pleased to answer your questions. If you would like, Off to Love. They will take our leave from Bill DeZellem with Titan. Thank you.

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

Brett Larsen: While the unfortunate combination of factors temporarily disrupted our growth and profitability in the second half of fiscal 2024, we move into fiscal 2025 with a strong pipeline of potential new business, and we're seeing significant improvements in our operating efficiencies and also a weakening peso. Moreover, we will continue to rebalance our manufacturing across our facilities in Mexico, the U.S, and Vietnam.

Speaker Change: If you 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 the signal to reach our equipment.

Speaker Change: Again, press star 1 to ask a question. We'll pause for just a moment to assemble the queue.

Speaker Change: We will take our first question from Bill DeZellum with Titan Capital. Please go ahead.

Brett Larsen: Brett, would you please start by sharing with us what proportion of the $10 million of annual savings, or roughly $0.70 per year, how much of that will be achieved in fiscal 25? Through the fiscal year 2025, most of it, if not all of it, Bill, we're expecting those cost savings to occur in the year. And some did fall into Q4. How about just the piece that falls into Q25?

Brett Larsen: We remain very encouraged by our progress and the potential for profitable growth over the long term.

Bill DeZellum: Thank you. Brett, would you please start by sharing with us what proportion of the $10 million of annual savings or what roughly 70 cents per year, how much of that will be achieved in fiscal 25?

Brett Larsen: In closing, I want to emphasize the execution of our strategy was only made possible by our investments in plants and equipment, but even more so, the skills, local knowledge and talents of our people. I want to thank our exceptional employees for their dedication and hard work during this past year and our shareholders for their continued support.

Brett: Through the fiscal year 2025, most of it, if not all of it, Bill. We're expecting those cost savings to occur in the year.

Speaker Change: And some did fall into the Q4. How about just the piece that falls into Q25?

Operator: This concludes the formal presentation.

Operator: Tony and I will now be pleased to answer your questions. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speaker phone, please make sure your mute function is turned off to allow the signal to reach our equipment. Again, press star one to ask a question.

Brett Larsen: You know, I would say the majority of it fell into our fourth quarter since most of that severance occurred during our third quarter. There was some limited amount, but the majority of it was felt in our fourth quarter. Okay, that is helpful. And so that explains why we see revenues down pretty meaningfully, but gross margin increasing completely counter to what we would normally expect. Absolutely. Okay. Well, congratulations. That's fantastic.

Speaker Change: You know, I would say the majority of it fell into our fourth quarter, since most of that severance occurred during our third quarter. There was some limited amount, but the majority of it was felt in our fourth quarter.

Operator: We'll pause for just a moment to assemble the queue.

Speaker Change: Okay, that is helpful. And so that explains why we see revenues down pretty meaningfully, but gross margin increasing completely counter to what we would normally expect.

Bill Dezellem: We will take our first question from Bill DeZellam with Titan Capital. Please go ahead. And I thank you. Brett, would you please start by sharing with us what proportion of 10 million of annual savings or roughly 70 cents per year? How much of that will be achieved in fiscal 25? Through the fiscal year 2012, most of it, if not all of it, Bill, we're expecting that those cost savings to occur in the year.

Brett Larsen: And the restructuring activities, I think that you mentioned on the last conference call that there may be more that needed to be done. And I wasn't sure if that was all incorporated in this savings, if that additional activity took place in Q4, or if there are additional cost savings that you anticipate that could develop in the remainder of this year. So, Bill, I think... Yeah, no, I think to that end, I think we're continuing to look at our operating efficiencies. There is some potential for additional restructuring in fiscal 2025. It's been great to see that even after the reductions in force, there really have not been any concerns, issues, problems, or delays in our production.

Speaker Change: Absolutely.

Speaker Change: Okay, well, congratulations. That's

Speaker Change: That's fantastic.

Speaker Change: And the restructuring activities, I think that you mentioned on the last conference call that there may be more that needed to be done. And I wasn't sure if that was all incorporated in this savings, if that additional activity took place in Q4, or if there is additional cost savings that you anticipate that could develop in the remainder of this year.

Bill Dezellem: And some did fall into the Q4, are you, how about just the past that falls into Q25? You know, I would say the majority of it fell into our fourth quarter, since most of that severance occurred during our third quarter. There was some limited amount, but the majority of it was felt in our fourth quarter. Okay, that is helpful. And so that explains why we see revenues down pretty meaningfully, but gross margin increasing, completely counter to what we would normally expect.

Speaker Change: So Bill, I think...

Bill DeZellum: Yeah, no, I think to that end, I think we're continuing looking at our operating efficiencies.

Bill DeZellum: There is some potential of additional restructuring in fiscal 2025.

Bill DeZellum: It's been great to see, even after the reductions in force, there really has not been any concerns, issues, problems, delays in our production. So we're continuing to look to see, is there some additional restructuring that could be done during fiscal 25?

Brett Larsen: So we're continuing to look to see if there is some additional restructuring that could be done during fiscal 2025. We're really not doing that right out of the gate just because we're, you know, because of the cyber event, we're on all cylinders trying to get through some of our orders backlog. But I could possibly foresee some restructuring to occur during the year. Great. That is that is helpful. And then I do want to make sure I have you touch on the four new wins this quarter. What is the size of each of those?

Speaker Change: We're really not doing that right out of the gate just because we're we're you know, because of the Cyber event we're we're on all cylinders trying to to get through some of our orders backlog But but I could foresee possibly some

Bill Dezellem: Absolutely. Okay, well, congratulations. That's fantastic. And the restructuring activities, I think that you mentioned on the last conference call, that there may be more that needed to be done. And I wasn't sure if that was all incorporated in this savings, if that additional activity took place in Q4, or if there is additional cost savings that you anticipate that could develop in the remainder of this year. So, Bill, I think, yeah. No, I think to that end, I think we're continuing looking at our operating efficiencies.

Speaker Change: Some restructuring to occur during the year.

Brett Larsen: And quite interesting stories might happen with each of them. Yeah, one is within our Arkansas facility. It's a fairly large program for Arkansas, and it's predominantly electronics. That one is roughly about $15 million win. The other large one was metals, predominantly metal fabrication, which will go down into our Mexico facility. And then the two others were also for Mexico, roughly between 5 and 10 million each. And the metal fab, how much?

Speaker Change: Great that is that is helpful and then I do want to make sure I have you touch on the four new wins this quarter. What is the what is the size of each of those and and what interesting stories might happen with with each of them?

Speaker Change: Yeah, one is within our Arkansas facility. It's a fairly large program for Arkansas. It's predominantly electronics. That one is roughly about a $15 million win.

Bill Dezellem: There is some potential of additional restructuring in fiscal 2025. It's been great to see, even after the reductions in force, that really has not been any concerns, issues, problems, delays in our production. So we're continuing to look to see, is there some additional restructuring that could be done during fiscal 25? We're really not doing that right out of the gate just because we're, you know, because of the cyber event, we're on all cylinders trying to get through some of our orders backlog. But I could foresee possibly some restructuring to occur during the year. Great, that is helpful.

Speaker Change: The other large one was a metals, predominantly metals fabrication, which will go down into our Mexico facility. And then the two others were also for Mexico, roughly between 5 and 10 million each.

Brett Larsen: Sorry, that too is about $15 million. So two $15 million wins this quarter. Yeah, good quarter. Congratulations, that's fantastic. And do you foresee any of these ramping either more or less slowly than the typical winds? Out of the gate, they all look great.

Speaker Change: And the metal fab is how much?

Speaker Change: Sorry that that too is about 15 million.

Speaker Change: [inaudible]

Speaker Change: The two $15 million wins this quarter.

Speaker Change: Yeah, good quarter.

Speaker Change: Congratulations, that's fantastic. And do you foresee any of these ramping either more or less slowly than the typical winds?

Bill Dezellem: And then I do want to make sure I have you touch on the four new wins this quarter.

Bill Dezellem: What is the size of each of those and quite interesting stories might happen with each of them? Yeah, one is within our Arkansas facility. It's a fairly large program for Arkansas. It's predominantly electronics. Not one is roughly about 15 million dollar win. The other large one was a metals, predominantly metals fabrication, which will go down into our Mexico facility. And then the two others were also for Mexico, roughly between five and 10 million each. And the metal fab is how much? Sorry, that too is about 15 million.

Brett Larsen: You know, there can be some delays. We don't know. My expectation is that by this time next year, they'll be fully wrapped. Okay, that's helpful. And then I did want to key in on the medical device because sometimes medical devices have special requirements, whether it be clean room certifications, etc, etc. Is there anything around that idea to this specific time, and the spirit of this question is to understand if this could be the beginning of a new category for you. Bill, we've always had some medical production. You know, we're extremely interested in pursuing that industry, so this was a good win for us. I don't think it's any more complex than what we built today.

Speaker Change: Thank you.

Speaker Change: Out of the gate, they all look great. You know, there can be some delays. My expectation is that by this time next year, they'll be fully wrapped.

Speaker Change: okay that's that's helpful and then I did want to key in on the medical device when sometimes medical devices have special requirements whether it be clean room certifications etc etc is there anything

Speaker Change: us around that idea of to this specific win and the spirit of this question is to understand if this could be the beginning of a new category for you.

Speaker Change: Bill, we've always had some medical production. You know, we're extremely interested in pursuing that industry. This was a good win for us. I don't think it's any more complex than what we built today.

Bill Dezellem: So, $215 million wins this quarter. Yeah, good quarter.

Bill Dezellem: Congratulations, that's fantastic.

Brett Larsen: We are certified in two of our locations for the manufacturing of medical devices. You know, this one isn't, much more, as mentioned, isn't any more complex than what we're building today. Thank you, Brett. I'll hop back in the queue, and congratulations on making it through the cyber incident.

Bill Dezellem: And do you see, foresee any of these ramping, either more or less slowly than the typical wins? Out of the gate, they all look great. You know, there can be some delays. We don't, you know, are my expectation is that by this time next year, they'll be fully wrapped. Okay, that's helpful.

Speaker Change: We are certified in two of our locations to manufacturing of medical devices. You know, this one isn't.

Speaker Change: Much more, as mentioned, isn't any more complex than what we're building today.

Speaker Change: Thank You Brett Mulholland back in queue and and congratulations on making it through the cyber incident so such a short window

Operator: So, such a short window. Thanks, Bill. As a reminder, if you would like to, press star 1, and we will pause. We will go back to Bill Dezellem with Titan. Okay, I'm happy to ask more here.

Bill Dezellem: And then I did want to key in on the medical device win. Sometimes medical devices have special requirements, whether it be clean room, certifications, et cetera, et cetera.

Bill DeZellum: Thanks, Bill.

Speaker Change: As a reminder, if you would like to ask a question at this time, please press star 1 and we will pause for just a moment.

Bill Dezellem: Is there anything around that idea to this specific win and the spirit of this question is to understand if this could be the beginning of a new category for you. Bill, we've always had some medical production, you know, we're extremely interested in pursuing that industry. This was a good win for us. I don't think it's anymore complex than what we've built today. We are certified in two of our locations to manufacturing of medical devices. You know, this one isn't, isn't much more, as mentioned, isn't any more complex than what we're building today.

Speaker Change: i

Speaker Change: And we will go back to Bill DeZellin with Titan Capital. Please go ahead.

Brett Larsen: So in the release, one thing that I was surprised to read, Brett, was that Vietnam is being used for lower production. I would have thought that would have been your lowest cost facility. And therefore, for those who can have the longer lead time that they would, you'd find some much bigger runs potentially coming there. Did I misread what you were trying to communicate? Or am I? There is some learning I need to do here. No, that really is our intent for Vietnam is to be, our lowest cost facility. I think, to your point, they need to have some ability to have increased transportation time. You know, there are a few.

Bill DeZellin: Okay, I'm happy to ask more here. So in the release, one thing that I was surprised to read, Brett, was that

Brett Mulholland: Vietnam is being used for lower production. I would have thought that would have been your lowest cost facility and therefore

Speaker Change: for those who can have the longer lead time that they would

Speaker Change: that you'd find some much bigger runs potentially coming there. Did I misread what you were trying to communicate or am I some learning I need to do here?

Speaker Change: No, that really is our intent of Vietnam is to be...

Bill Dezellem: Thank you, Brett. I'll hop in back in queue and, and congratulations on making it through the cyber incident. So such a short window. Thanks Bill.

Speaker Change: our lowest cost facility. I think to your point they need to have some ability to have increased transportation time.

Speaker Change: You know, there are a few

Operator: As a reminder, if you would like to ask a question at this time, please press star one and we will pause for just a moment.

Brett Larsen: Smaller programs in Vietnam, but longer term, my expectation is that as that grows, those will really be higher volume, less mixed type products that are better suited for our lowest cost site. Did that answer it, Bill? Yes, it did. Thank you.

Speaker Change: smaller programs in Vietnam but longer term my expectation is that as that grows those will really be more higher volume less mix type products.

Bill Dezellem: And we will go back to Bill DeZellan with Titan Capital. Please go ahead. Okay, I'm happy to ask more here. So in the release, one thing that I was surprised to read, Brett, was that Vietnam is being used for lower production. I would have thought that would have been your lowest cost facility and therefore for those who can have the longer lead time that they would, that you find some much bigger runs potentially coming there.

Speaker Change: that are better suited for our lowest cost site.

Brett Larsen: And then let's jump to the cyber incident for a moment. The $2.3 million cost, where did that fall within the P&L? Predominantly in cost of goods.

Speaker Change: Did that answer it, Bill?

Bill: It did, thank you. And then let's jump to the cyber incident for a moment, the 2.3 million dollar cost, where did that fall within the P&L?

Brett Larsen: So I would say two-thirds of it is in cost of goods, and one-third of it is in GNA. So the outside advisory firm falls into the general administration, the operating expenses, whereas the required wages that we paid to keep workers were captured in Costa Goods. And then I think that you referenced in the release that you would anticipate that the 15 million in revenues that you believe that you missed out on, that those will be recaptured over the course of fiscal 25. Is that correct, or should you be able to recapture the vast majority of that here in the first fiscal quarter? No, it's going to take us more than just a quarter to get caught up.

Speaker Change: Predominantly in cost of goods. So I would say two-thirds of it is in cost of goods. One-third of it is in GNA.

Bill Dezellem: Did I misread what you were trying to communicate or some learning I need to do here? No, that really is our intent of Vietnam is to be our lowest cost facility. I think to your point, they need to have some ability to have increased transportation time. You know, there are a few smaller programs in Vietnam, but longer term, my expectation is that as that grows, those really be more higher volume less mixed type products that are that are better suited for our lowest cost site. Did that answer Bill?

Speaker Change: So the outside advisory firm falls into the general administration, the operating expenses.

Speaker Change: whereas the required wages that we paid to keep workers was captured in cost of goods.

Speaker Change: Understood. And then I think that you referenced in the release that you would anticipate that the 15 million of revenues that you believe that you

Mark Larson: and Mark Larson. We have a number of questions that we have missed out on that those will be recaptured over the course of fiscal 25. Is that correct? Or should you be able to recapture the vast majority of that here in the first fiscal quarter?

Bill Dezellem: It did, thank you. And then let's jump to the cyber incident for a moment at $2.3 million cost. Where did that fall within the P&L? Predominantly in cost of goods. So I would say two-thirds of it is in cost of goods, one-third of it is in GNA. So the outside advisory firm falls into the general administration, the operating expenses, whereas the required wages that we paid to keep workers was captured in cost of goods.

Brett Larsen: So granted, those specific orders will be made up in the first quarter, but then there's a delay, possibly, of things that our customers wanted in the first quarter. So to get completely caught up on that $15 million of lost orders, it may take us the better part of a year. Okay, so where I was hoping to go with that was that $15 million. You add that to what you just did in the quarter, and that puts you already at the low end of your guidance. You have legacy customers that are showing some signs of rebounding. You have new business ramping up. It just appeared like there may have been some conservatism built into the numbers.

Speaker Change: No, it's going to take us more than just a quarter to get caught up. So, granted, those specific orders will be made up in the first quarter.

Speaker Change: But then there's a delay, possibly, of things that our customer wanted then in the first quarter. So to get completely caught up on that $15 million of lost orders, it may take us the better part of a year.

Speaker Change: Okay so where I was hoping to go with that was that 15 million you add that to what you just did in the quarter and that puts you already to the low end of your guidance.

Speaker Change: You have legacy customers that are showing some signs of rebounding. You have new business ramping that disappeared like there may have been some conservatism built into the numbers.

Bill Dezellem: Understood. And then it's think that you referenced in the release that you would anticipate that the 15 million of revenues that you believe that you missed out on, that those will be recaptured over the course of fiscal 25. Is that correct or should you be able to recapture the vast majority of that here in the first fiscal quarter? No, it's going to take us more than just the quarter to get caught up.

Brett Larsen: And I suppose, to some degree, that still stands a little bit, but maybe not to the full 15 million magnitude as I was saying. Yeah, that's accurate. And then one nitpicky question, if I may, there was a restructuring cost reversal that was, if I read it correctly, a severance expense reversal of $223,000. Are we reading that right? And what led to that reversal? It's not often that we see that. Sure. No, that is incorrect.

Speaker Change: and I suppose, to some degree, that's still...

Speaker Change: Still stands a little bit, but maybe not to the full 15 million magnitudes. I was thinking

Speaker Change: Yeah, that's accurate.

Speaker Change: And then one nitpicky question, if I may, there was a restructuring cost reversal that was, if I read it correctly, seven severance expense reversal of 223

Bill Dezellem: So grant that those specific orders will be made up in the first quarter. But then there's a delay, possibly, of things that our customer wanted then in the first quarter. So to get completely caught up on that $15 million of lost orders, it may take us the better part of a year. Okay, so where I was hoping to go with that was that $15 million, you add that to what you just did in the quarter.

Speaker Change: thousand. Are we reading that right and what led to that to reversal? It's not often that we see that.

Brett Larsen: That was a reversal of expected severance expense. So, due to the cyber event and then also to the recovery of some of our legacy customers in Mexico, planned reductions in force of a few of our people did not occur. So that is actually a recovery to the income statement. So included in the fourth quarter is, you know, that rough $200,000 worth of benefit because we didn't go through the severance that was anticipated. Okay, that's helpful.

Speaker Change: Sure, no that that that is correct. That was a reversal of expected severance expense.

Speaker Change: So, due to the cyber event and then also to the recovery of some of our legacy customers in Mexico, planned reductions in force of a few of our people did not occur.

Bill Dezellem: And that puts you already to the low end of your guidance. You have legacy customers that are showing some signs of rebounding. You have new business ramping. It just appeared like there may have been some conservatism built into the numbers. And I suppose to some degree, that still stands a little bit, but maybe not to the full 15 million magnitude that I was thinking. Yeah, that's accurate.

Speaker Change: So that is actually a recovery to the income statement. So included in the fourth quarter is, you know, that rough $200,000 worth of benefit because we didn't go through severance that was anticipated.

Brett Larsen: And then there is one additional question. So, talking about the legacy customers rebounding. I'd provide a little more detail and perspective on that, and the spirit of this question, of course, is if you look at the last couple of weeks, there's been an awful lot of question marks about the economy, at least in the popular press. We would love to get your view of what you're seeing from your customers and what your sense is of their demand, and you know that whole phenomenon, so as much perspective and color that you can provide, we'll take all of that.

Bill Dezellem: And then one nitpicky question, if I may, there was a restructuring cost reversal that was, if I read it correctly, seven, seven, six cents reversal of 223,000. Are we reading that right? And what led to that to reversal?

Speaker Change: Okay that's helpful and then one

Speaker Change: provide a little more detail and perspective on that. And the spirit of this question, of course, is if you look in the last couple of weeks, there's been an awful lot of question marks about the economy, at least in the popular press. Would love to get your view of what you're seeing.

Bill Dezellem: It's not often that we see that. Sure. No, that is correct. That was a reversal of expected severance expense. So due to the cyber event, and then also to the recovery of some of our legacy customers in Mexico, planned reductions in force of a few of our people did not occur. So that is actually a recovery to the income statement. So included in the fourth quarter is that rough $200,000 worth of benefit because we didn't go through severance that was anticipated.

Bill Dezellem: Okay, that's helpful.

Speaker Change: from your customers and what your sense is of their end demand and, you know, that whole phenomenon. So as much perspective and color that you can provide, we'll take all of it.

Brett Larsen: Yeah, at a real high level, Bill, we saw some retraction in our legacy customers' forecast. You know, it began to occur late in 2023 and then I would say probably the first three or four months of this calendar year.

Speaker Change: Yeah, at a real high level Bill, we saw some some retraction of our legacy customers forecast. You know, it began to occur late 2023 and then I would say probably the first three or four months of this calendar year.

Brett Larsen: We're now seeing some increased demand from many of our customers just, you know, we're actually seeing some demand that's coming back from maybe a dip that occurred earlier in the calendar year. You know, I think I definitely see that our customers are far more, they have a far more concerted focus on those forecasts in making sure that they aren't over-inventoried. So I think there is a little more ebbs and flows, but at a really high level, we're feeling far more confident that there really is some strong demand, some returning demand from those legacy customers in the forecast that we're seeing from them.

Speaker Change: We're now seeing some increased demand.

Bill Dezellem: And then one additional question, sort of talking about the legacy customers rebounding. Provide a little more detail and perspective on that. And the spirit of this question, of course, is if you look in the last couple of weeks, there's been an awful lot of question marks about the economy, at least in the popular press. Would love to get you a view of what you're seeing from your customers and what your sense is of their end demand and that whole phenomenon. So as much as much perspective and color that you can provide, we'll take all of it.

Speaker Change: from many of our customers, just, you know...

Speaker Change: We're actually seeing some demand that's coming back from maybe a dip that occurred earlier in the calendar year. I definitely see that our customers have a far more concerted focus on those forecasts.

Speaker Change: in making sure that they aren't over-inventoried. So I think there is a little more ebbs and flows, but at a really high level, we're feeling far more confident that there really is some strong demand, some returning demand from those legacy customers.

Bill Dezellem: Yeah, at a real high level, Bill, we saw some retraction of our legacy customers forecast to, you know, it began to occur late 2023. And then I would say probably the first three or four months of this calendar year. We're now seeing some increased demand from many of our customers. Just, you know, we're actually seeing some, some demand that's coming back from maybe a dip that occurred earlier in the calendar year.

Speaker Change: in the forecast that we're seeing from them. You know, there are definitely peaks and valleys, but I think for the most part, our anticipation is that we'll get back to 2023 levels in the next six months. And with these lower costs, that's going to create some pretty meaningful flow to the bottom line.

Brett Larsen: You know, there are definitely peaks and valleys, but I think for the most part, our anticipation is that we'll get back to 2023 levels in the next six months. And with these lower costs, that's going to create some pretty meaningful flow to the bottom line. Absolutely. Well, thank you again, and congratulations again.

Speaker Change: Absolutely. Thank you again and congratulations again. Look forward to look forward to seeing that develop.

Bill Dezellem: You know, I think I definitely see that our customers are far more, far more, far more concerted focus on those forecasts in making sure that they aren't over inventory. So I think there is a little more ebbs and flows, but at a really high level, we're feeling far more confident that there really is some strong demand, some returning demand from those legacy customers in the forecast that we're seeing from them. You know, there definitely peaks and valleys, but I think for the most part, our anticipation is that we'll get back to 2023 levels in the next six months. And with these lower costs, that's going to, that's going to increase in pretty meaningful flow to the bottom line. Absolutely.

Brett Larsen: Look forward to seeing that develop. Thanks, Bill, from George Melas with MK. Thank you. Good afternoon, guys. Brett, congratulations on your first call as CEO. Ed Cohen, very nice meeting you, and good to meet you as well.

Speaker Change: Thanks Bill. I think we'll take our next question from George Mellis with MKH Management. Please go ahead.

George Mellis: Thank you. Good afternoon, guys. Brett, congratulations on your first call as CEO.

George Mellis: Anthony, very nice meeting you. Good to meet you as well.

George Melas: A follow-up on Bill's question regarding cybersecurity expenses. So, if we take those out from the cost of sale... The growth margin then was actually well above nine percent, and I was looking back at my model, and the last two quarters where you had a growth margin above nine percent were in June 2014 and June 2020. So basically, over the last 10 years, you've had two quarters of nine percent, and here you are at nine percent, including a significant amount of extra costs. So where does Gross Margin go from here, Brett? George, that's a great question.

George Mellis: A follow-up on Bill's question regarding the cybersecurity expenses, so if we take those out from cost of sales

Speaker Change: Gross margin then was actually well above nine percent.

Speaker Change: And I was looking back at my model.

Speaker Change: And the last two quarters where you had a growth margin above 9% was in June 2014 and June 2022. So basically over the last 10 years you've had two quarters of a 9%.

Bill Dezellem: Thank you again and congratulations again. Look forward to, look forward to seeing that and develop. Thanks Bill.

Speaker Change: And here you are at 9%, including a significant amount of extra costs.

George Melas: We'll take our next question from George Melis with MKH Management. Please go ahead. Thank you. Good afternoon guys.

Speaker Change: So, where does gross margin go from here, Brett?

George Melas: Congratulations on your first call at CEO and Tony. Very nice to follow up on this question regarding the cybersecurity expense. So, if we dig those out from cost of sale, Rose Margin then was actually well above 9%. And I was looking back at my model and the last two quarters where you had Rose Margin above 9%, was in June 2014, in June 2022. So, basically over the last 10 minutes you had two quarters of a 9%, and here you are 9%, including significant amount of extra costs.

Speaker Change: George, that's a great question. Our expectation is that we want to continue to keep that gross margin to the 9% to 10% level.

Brett Larsen: Our expectation is that we want to continue to keep that gross margin at the nine to 10% level. It is great to see some significant improvement. You know, as you mentioned, we haven't seen this for upwards of 10 years.

George Mellis: It is great to see some significant improvement.

Speaker Change: You know, as you mentioned, we haven't seen this for upwards of 10 years. You know, the weakened peso definitely helped, but I think as well the reduction in force that we did was

Brett Larsen: You know, the weakened peso definitely helped, but I think the reduction in force that we did was..., was critical in getting us back to the profitability that we're really seeking. You know, where it goes from here, I'd love to be able to have a crystal ball and be able to understand what the peso is going to do and, you know, and what we are going to be able to continue to take advantage of as far as operating efficiencies go.

Speaker Change: was critical in getting us back to the profitability that we're seeking.

Speaker Change: You know, where it goes from here, I'd love to be able to have a crystal ball and be able to understand what the PESO is going to do and, you know, what are we going to be able to continue to...

Brett Larsen: But I think our goal is to continue to drive that gross margin above 9 percent, the 9 to 10 percent. That really is what we will be seeking going forward. Okay. But, I mean, if we, I'm just trying to do the math, if we take out some of the costs that you, you know, related to the cyber security event and the cost of sales. And we're talking about revenue of just $126 million a year. We see that to be a candle even slightly above. So, he seems like he's well-positioned for Cisco 25 and beyond.

Speaker Change: take advantage of as far as operating efficiencies.

Speaker Change: But I think our goal is to continue to drive that gross margin above 9%, the 9 to 10%. That really is what we will be seeking going forward.

George Melas: So, when does Rose Margin go from here, Brett? George, that's a great question. Our expectation is that we want to continue to keep that Rose Margin to the 9% to 10% level. It is great to see some significant improvement. As you mentioned, we haven't seen this for upwards of 10 years. There's the weakened peso definitely helped, but I think as well the reduction in force that we did was what's critical in getting us back to the profitability that we're seeking.

Speaker Change: Okay.

Speaker Change: But, I mean, if we, I'm just trying to do the math, if we take out some of the costs that you, you know, related to the cybersecurity then, and the cost of sales,

Speaker Change: and we're talking about revenue of just 126 million, we seem that to be a channel even slightly above.

Brett Larsen: Yeah, right now, right now, I would agree, George, it looks like we're well positioned to have a good year with that increased margin. I, you know, I'd caution, you know, I'm also hoping to be able to include some incentive compensation, which is not in there today. That's not going to change the material.

George Melas: Where it goes from here, I'd love to be able to have a crystal ball and be able to understand what the peso is going to do, and what are we going to be able to continue to take advantage of as far as operating efficiencies. But I think our goal is to continue to drive that Rose Margin above 9%, the 9% to 10%, that really is what we will be seeking going forward.

Speaker Change: Yeah, right now I would agree, George. It looks like we're well positioned to have a good year with that increased margin.

Speaker Change: I'm also hoping to be able to include some incentive compensation, which is not in there today. That's not going to change materially. There will be some additional costs as we become more profitable.

Brett Larsen: There will be some additional costs as we become more profitable. Yeah, yeah, great. Maybe talk to me about this incentive comp.

Brett Larsen: You had a small reversal in the June quarter. Does that mean that there was basically almost no incentive comp for the entire fiscal year 24? Yeah, so our stock compensation expense has been a stock appreciation right. That may change a bit in the future, but yeah, there's very limited, very little stock comp that's run through our most recent fiscal year. Okay, great, it makes sense. Bye! Maybe we're talking about VSG&A. It has usually hovered around six, six and a half million dollars.

Speaker Change: Yeah, yeah, great. Maybe talking just about this incentive comp, you had a small reversal in the June quarter. Does that mean that there was basically almost no incentive comp for the entire fiscal year of 24?

Speaker Change: Yeah, so our stock compensation expense has been a stock appreciation rights.

George Melas: We've seen that to be a panel slightly above. So, she says like your well position for fiscal 25 and beyond. Yeah, right now, right now, I would agree, George, it looks like we're well positioned to have a have a good year with that increased margins. You know, I'm also hoping to be able to include some incentive compensation, which is not in there today. That's not going to change the material. There is there, there will be some additional costs as we become more profitable.

Speaker Change: That may change a bit in the future, but yeah, there's very limited, very little stock comp that's run through our most recent fiscal year.

Speaker Change: Okay, great, makes sense.

Speaker Change: It has usually hovered around six, six and a half million dollars.

Brett Larsen: Is that how you see it in the future, or how do you think about it? Well, our SG&A this last quarter did include roughly about a half million dollars of cyber. So, you know, it would have been just over that.

George Melas: Yeah, yeah, great. Let me talk to you just about this incentive comp. You have this small reversal in the June order. Does that mean that it was basically almost no incentive comp for the entire fiscal year 24? Yeah, so our stock compensation expense has been a stock appreciation, right? That may change a bit in the future, but yeah, there's very limited, very little stock comp that's run through our most recent fiscal year.

Speaker Change: Well, our SG&A this last quarter did include roughly about a half million dollars of cyber expense.

Speaker Change: So, you know, would have been just over that.

Brett Larsen: But again, that doesn't include any incentive compensation, which I'm hoping to be able to pay this year, you know. So that may grow a little bit. We are seeing, you know, across the board, to be able to retain good talent, that there have been some labor increases. Uh. So, I would say, that six and a half seems light to me.

Speaker Change: But again, that doesn't include any incentive compensation, which I'm hoping to be able to pay this year. So that may grow a little bit. We are seeing across the board to be able to retain good talent.

Speaker Change: that there have been some some labor increases.

George Melas: Okay, great. Maybe talking about the SGA, it has been usually hovered around $6.5 million. Is that how you see it in the future, or how do you think about it? Well, our SGA, the SGA, this last quarter, did include roughly about a half million dollars of cyber expense. So, you know, it had been just over that, but again, that doesn't include any incentive compensation, which I'm hoping to be able to pay this year.

Speaker Change: So, I would, you know, that six and a half seems light to me.

Brett Larsen: Okay. And then maybe a question, I guess I'm asking a question about the numbers. What about the interest expense? That seemed pretty high this quarter.

Speaker Change: Okay.

Speaker Change: And then maybe a question, I guess I'm asking a question about the numbers, what about the the interest expense? That seems pretty high this quarter it seems.

Brett Larsen: Yeah, we with the most recent amendment with Bank of America, our costs did go up. Yeah, you know, we'll be anxiously awaiting what the Fed does over the next few months and in the next few quarters. That will step down with the Fed Fund rate as soon as changes are made. But we're also actively trying to pay down that debt because it is very costly.

Speaker Change: Yeah, we, with the most recent amendment with Bank of America, our costing did go up.

Speaker Change: yeah you know we'll be anxiously awaiting what the Fed does over the next few few months and in few quarters

Speaker Change: That will step down with the Fed Fund rate as soon as changes are made. But we're also actively trying to

Speaker Change: pay down that debt because it is very costly.

Brett Larsen: Great, okay, and... And Brett, you've been using Keytronics for a very long, for quite some time, for a long time, so, but there's a change in leadership going on, right, with Craig, so he's stepping down, he's still going to be with us, but any particular thoughts about, the next year or two or sort of, I like the press release and having the adjusted net income, I think it's very helpful, so I'm going to commend you for that. Good.

George Melas: So that may grow a little bit. We are seeing across the board to be able to retain good talent, but that there have been some, some labour increases. So, I would, you know, that six and a half things light to me. Okay. And then maybe a question, I guess I'm asking question, but the numbers, what about the interest expense? That's in pretty high, that's quarter-eging. Yeah, we, with the most recent amendment with Bank of America, our costing did go up.

Speaker Change: Great, okay.

Speaker Change: and-

Speaker Change: And Brent, you've been using the Futronics for a very long, for quite some time, for a long time, so...

Speaker Change: But there's a change in leadership going on, right, with Craig, so he's stepping down. He's still going to be involved, but any particular thoughts about

Speaker Change: The next year or two, or sort of...

Speaker Change: I like the press release and having the adjusted net income, I think it's very helpful, so I want to commend you for that.

Brett Larsen: Any change you think to any desire you have that you may want to communicate with us? No, I appreciate that. I think, George, I think the succession was a plan that was done over a number of years, and I think one of Craig's greatest legacies is the staff that he created. I am not anticipating any big changes in leadership anytime soon.

George Melas: Yeah, you know, we'll be anxiously awaiting what the Fed does over the next few months and in few quarters. That'll step down with the Fed fund rate as soon as changes are made, but we're also actively trying to pay down that debt because it is very costly. Okay. And when you've been using the electronics for very long, sometimes for a long time. So, but there's a change in leadership going on, right, with Craig.

Speaker Change: Any change you think, any desire you have that you may want to communicate with us?

Speaker Change: No, I appreciate that. I think, George, I think the succession was a plan that was done over a number of years.

Speaker Change: One of Craig's greatest legacies is the staff that he created. I am not anticipating any big changes in leadership anytime soon. Tony's been well prepped.

Brett Larsen: Tony's been well-prepared to become probably a better CFO than I ever was. But I think our strategy going forward is going to be far more focused on profitability, you know, to ensure that. And that's more on an economic value-add basis of how much capital is required to make that much profit, and is it a good fit for Keytronix? You know I think that'll definitely be our focus going forward, and you know we've got we're headed in the right direction, but we've got a lot of work still to do.

Tony Voorhees: to become probably a better CFO than I ever was. But I think our strategy going forward is going to be far more on profitability, you know, to ensure that

George Melas: So, stepping down, he's still going to be going, but any particular thoughts about the next year or two or sort of during the impact you see, I like, I like the press release and having the adjusted net income, I think it's very helpful. So, I'm going to commend you for that. Any good, anything, any change you think to any desire you have that you may want to communicate with us? No, I appreciate that.

Tony Voorhees: And that's more an economic value-add basis of how much capital is required to make that much profit. And is it a good fit for Keytronic?

Tony Voorhees: You know, I think that will definitely be our focus going forward. And, you know, we're headed in the right direction, but we've got a lot of work still to do.

Brett Larsen: Great. OK. We'll be part of your journey. Thanks a lot. Thanks, George. Tony and I look forward to speaking to you again next quarter. Thanks. This concludes today's call. Thank you for your participation. Thank You For Watching!

Speaker Change: Great, okay.

Tony Voorhees: will be part of the journey. Thanks a lot.

George Melas: I think George, I think the succession was a plan that was done over a number of years. And I think when it cracks greatest legacies is the staff that he created. I am not anticipating any big changes in leadership anytime soon. Honies have been well-prapped to become probably a better CFO than I ever was. But I think our strategy going forward is going to be far more on profitability to ensure that and that's more an economic value-ad basis of how much capital is required to make that much profit, and is it a good fit for Key Tronic? I think that will definitely be our focus going forward, and we've got – we're headed in the right direction, but we've got a lot of work still to do.

George Mellis: Thanks, George.

Speaker Change: Once again, if you would like to ask a question at this time, please press star 1. We'll pause for just a moment.

Speaker Change: And it appears there are no further questions at this time. Mr. Larsen, I will turn the conference back to you for any additional or closing remarks.

Mr. Larsen: Thank you again for participating in today's conference call. Tony and I look forward to speaking to you again next quarter. Thanks.

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

Speaker Change: [inaudible]

George Melas: Great, okay. We'll be fine with you, and thanks for that. Thanks, George. Once again, if you would like to ask a question at this time, please press star one. We'll pause for just a moment. And it appears there are no further questions at this time.

Brett Larsen: Mr. Larsen, I will turn the conference back to you for the additional closing remarks. Thank you again for participating in today's conference call. Tony and I look forward to speaking to you again next quarter. Thanks.

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