Q1 2025 Key Tronic Corp Earnings Call
Please stand by.
Speaker Change: Good day and welcome to the key tronic FY25 Q1 Investor call. Today's conference is being recorded. At this time I like to turn the conference over to Tony Voorhees, Chief Financial Officer. Please go ahead.
Good afternoon everyone. I am Tony Voorhees, Chief Financial Officer of Keytronic. I would like to thank everyone for joining us today for our investor conference call. Joining me here in our Skullcan Valley Headquarters is Brett Larsen, our President and Chief Executive Officer.
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.
Speaker Change: Or the company's future financial performance. Please remember that such statements are only predictions. Excellent.
or Results May differ materially. For more information you may review the risk factors outlined in the documents the company has filed with the SEC. Specifically our latest 10K, Quarterly 10Qs, in 8Ks.
Speaker Change: 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 with the webcast and the link can be found on our Investor Relations website.
Speaker Change: In addition, the slides together with a recorded version of this call will be available on the investor-relation section of our website.
Speaker Change: We will also discuss certain non-gap financial measures on this call.
Speaker Change: additional information about these non-GAAP measures.
Speaker Change: and reconciliations to the most directly comparable gap measures.
Speaker Change: are provided in today's press release, which is posted in the Investor Relations section of our website.
Speaker Change: For the first quarter of fiscal 2025, we reported total revenue of $131.6 million, compared to $150.1 million in the same period of fiscal 2024.
Speaker Change: Revenue in the first quarter of fiscal 2025 was adversely impacted by customer-driven design and qualification delays of three programs that we believe impacted revenue by approximately nine million dollars.
Speaker Change: These delays have since been resolved on two of these programs and shipments have resumed in the second quarter.
Production in our Mexico facilities in the first quarter of fiscal 2025 increased by approximately 10% sequentially from the prior quarter.
Speaker Change: Despite the production delays and lower than anticipated revenue, we saw significant improvement in our operating efficiencies compared to the first quarter of fiscal 2024.
Speaker Change: primarily as a result of recent headcount reductions, a favorable weakening of the Mexican peso, and continued improvements in the supply chain.
Speaker Change: Gross margin was 10.1 percent, and operating margins were 3.4 percent in the first quarter of fiscal 2025, up from 7.2 percent and 22.2 percent, excuse me, respectively.
Speaker Change: Partially offsetting these improvements was a write-down of approximately 0.8 million of capitalized variances during the first quarter of fiscal 2025.
Accumulated capitalized variances occur when higher production costs are captured in inventory built into previous periods.
Speaker Change: We expect that in the coming quarters the reported margins from improving efficiency will be partially offset by the reduction in capitalized variances.
George Melas, George Melas, George Melas, George Melas,
Speaker Change: Our net income was $1.1 million, or $0.10 per share, for the first quarter of fiscal 2025, compared to $0.3 million, or $0.03 per share, for the same period of fiscal 2024.
Speaker Change: Adjusted net income was $1.2 million or $0.11 per share for the first quarter of fiscal 2025 compared to break-even for the same period of fiscal 2024.
Speaker Change: Thanks for watching!
Speaker Change: For more 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 first quarter of fiscal 2025 by reducing inventory by approximately 31 million dollars or 24 percent for the same time a year ago.
Speaker Change: These improvements in inventory levels primarily reflect our concerted effort to drive inventory reductions and increase component availability.
Speaker Change: 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 that we drive demand for parts differently than in historical periods.
Speaker Change: 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.
Speaker Change: During the first quarter, we also reduced our total liabilities by a combined amount of $29.7 million, or 11% from a year ago.
Speaker Change: Our current ratio was 2.6 to 1 compared to 2.4 to 1 from a year ago.
Speaker Change: At the same time, accounts receivable DSOs were at 92 days compared to 88 days a year ago, reflecting reductions in net sales at higher rates than reductions in receivables.
Speaker Change: Total capital expenditures were about 0.4 million for the first quarter of fiscal 2025 and we're expecting for the full year to be approximately 8 to 10 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, plastic molding capabilities.
Speaker Change: while utilizing leasing facilities as well as make efficiency improvements to prepare for growth and add capacity.
Speaker Change: particularly in our Vietnam and U.S. locations.
For the second quarter of fiscal 2025, we expect to report revenue in the range of $130 to $140 million.
Speaker Change: Further moving into fiscal 2025, we are pleased to continue to see our new programs ramping, cost and efficiency improvements from our recent overhead reductions taking hold,
Speaker Change: and a continued weakening of the Mexican peso. Taking all these factors into consideration, we expect net income in the range of $0.05 to $0.15 per diluted share.
Speaker Change: and remain focused on improving our balance sheet.
Speaker Change: Over the longer term, we believe we are increasingly well positioned to win new programs and profitably expand our business. That's it for me, Brett.
Brett Larsen: Thanks Tony. While we did not meet revenue expectations in our first quarter of fiscal 2025,
Brett Larsen: due to unavoidable delays for a few programs, we are pleased to see our improved operating efficiencies.
Brett Larsen: and Margins begin to take place. A recent workforce reduction in Mexico, trimming of non-profitable programs, and making a concerted effort to reduce working capital are starting to pay off.
Brett Larsen: The weakening Mexican peso during the quarter also further strengthened our reported margins. We also continue to reduce our inventories, which are now much more in line with our revenue levels.
Brett Larsen: Over the longer term, we expect that these strategic changes will improve our overall profitability.
Brett Larsen: During the first quarter, we continued to expand our customer base, winning new programs involving manufacturing production equipment, vehicle lighting, and commercial pest control.
Brett Larsen: The strong pipeline of potential new business underscores the continued trend towards onshoring and dual sourcing of contract manufacturing.
Speaker Change: Global logistics problems and China-U.S. geopolitical tensions may continue to drive OEMs to re-examine their traditional outsourcing strategies.
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 widely accepted as a smart long-term strategy.
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 have right-sized our operations in order to remain cost competitive.
Speaker Change: It has also become clear that our customers near shoring from China may have a different calculus for selecting a geographic location for business.
Speaker Change: We believe our Mexico operations provide a full suite of vertical manufacturing for customers looking to near shore their manufacturing processes.
Speaker Change: Our Mexico capabilities include plastic molding, sheet metal fabrication and paint, printed circuit board assembly, and final production assembly, all contained within a consolidated campus.
Speaker Change: For those customers who struggled with China production due to their flexibility requirements, we believe our U.S. sites offer outstanding flexibility, engineering support, and ease of communications.
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.
Speaker Change: A significant amount of this fiscal year's planned capital expenditures are scheduled to add additional capacity and capability in our Da Nang, Vietnam location.
Speaker Change: In coming years, we expect our Vietnam facility to play a major role in future growth.
Speaker Change: While our China growth has slowed and many companies have decided to take risk mitigation steps with their China manufacturers, the fact remains that many components still must 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.
Speaker Change: Additionally, our China production facility continues to be profitable, continues to build legacy Keytronic programs, and has found recent success in winning new programs with direct Chinese customers.
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 Keytronic's 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.
Speaker Change: We anticipate continued increase in number and capability of our design engineers in coming quarters.
Speaker Change: We also continue to invest in vertical integration and manufacturing.
Speaker Change: 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.
Speaker Change: We believe this expertise will increasingly set us apart from our competitors of a similar size.
Speaker Change: We believe global logistics problems, increased cost of capital, geopolitical tensions, and a heightened concern about supply chain will continue to drive the favorable trend of contract manufacturing returning to North America.
Speaker Change: as well to our expanding Vietnam facilities.
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: Thanks for watching!
Speaker Change: While the customer-driven delay temporarily disrupted our growth and profitability in the first quarter of fiscal 2025, as we move further into fiscal 2025 with a strong pipeline of potential new business.
Speaker Change: and we're seeing significant improvements in our operating efficiencies and a continued weakening peso.
Speaker Change: Moreover, we will continue to rebalance our manufacturing across our facilities in Mexico, the U.S., and Vietnam.
Speaker Change: We remain very encouraged by our progress and the potential for profitable growth over the longer term.
Speaker Change: Thank you.
Speaker Change: This concludes the formal portion of our presentation. Tony and I will now be pleased to answer your questions.
Speaker Change: Thank you. If you would like to signal with questions, please press star 1 on your touchtone telephone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1. If you would like to signal with questions, star 1.
Speaker Change: And our first question will come from Bill DeZellum with Titan Capital.
Bill DeZellum: Thank you. Let's start with the three wins that you noted in the press release. What is the size of those?
Speaker Change: Sure, the first two are around $5 million and the third is just under.
Bill DeZellum: Great, thank you. And then let's talk, if you would please, and go into some more depth on the circumstances of the three programs that were were delayed.
Speaker Change: Sure, three of those programs did have roughly a $9 million impact to the overall quarter.
Speaker Change: The first was a delay in production for some qualification improvements on essentially their product. That production successfully resumed in the early part of October.
Speaker Change: The second was a new updated version and fortunately as of last week we're back ramping production of that and expect by the third quarter of this fiscal year
Speaker Change: to be back up to the level it was historically.
Speaker Change: And then the third is next-gen design that likely will delay until roughly the middle of our third quarter February or March time frame.
Speaker Change: All right, so Brett, since I've never actually run a manufacturing business...
Speaker Change: It's actually the
Speaker Change: It is a...
Speaker Change: for a couple of reasons. One is that the materials required have a longer lead time. Some of the new updated version required some some changes in some of the components. So some of that has a little bit of a longer lead time to get full production and the rest is just ramping staff and production back up.
Speaker Change: Go to Beadaholique.com for all of your beading supplies needs!
Speaker Change: right in the middle of, right in the middle of Q Holiday.
Speaker Change: Nope, just, you know, with the anticipated couple of weeks of holidays this quarter as well.
Speaker Change: Okay, thank you. And then the one that is not ramping until February or March, what are the dynamics that are leading to what seems like a long delay to get that one back on track?
Speaker Change: There's some seasonal demand for that particular product so the the customer is is cautiously reviewing the current design and making certain modifications.
Speaker Change: The delay in that really doesn't hurt their demand cycle. And, you know, again, we're expecting that to come back online in February.
Speaker Change: Thank you.
Speaker Change: Okay, that is helpful. And then did I understand correctly in the opening remarks and what you have said that each of these were
Speaker Change: Existing programs but the next generation and the issues were tied to qualification of the next generation.
Speaker Change: Yes, all three were. That is correct. And Brett, was that next-gen qualification tied to something to do with their end customers or with the product working its way through the Keytronic plants?
Brett Larsen: no it's it's really on their side it's it's it's design and capability and just taking it to the to the next gen of that of that particular product
Brett Larsen: It was scheduled to be more seamless on all three of those, and each of them, unfortunately, we did see some hiccups in the actual timing of when we could get production.
Brett Larsen: Go to www.Flydreamers.com for more.
Speaker Change: So none of these were a function of something that you all didn't do well or a misstep on your side, essentially.
Speaker Change: Absolutely not. In fact, I think we have helped in each of those three instances in providing some expertise I think that has actually expedited the resolution of all three.
Speaker Change: Okay, great. Thank you. And then, Tony, would you please...
Speaker Change: re-explain the capitalized variants that you referenced in your opening remarks. I either may have been distracted or otherwise didn't quite follow what you were conveying.
Tony Voorhees: You bet. Thanks for the question, Bill. Yeah, so we did write down our capitalized variances by about $800,000 during the quarter.
Speaker Change: or occurred when we had higher-costed products sitting in inventory?
Speaker Change: And as we sell through or ship those products to our customers, we'll see those capitalized variances come off of our balance sheet. So as they come off, our capitalized variances will kind of reflect that.
Speaker Change: It just so happens that, in this case, they're a write-down of inventory.
Speaker Change: and we expect, like I kind of mentioned in my in my opening remarks there, we expect to see that to continue to happen for another quarter or two possibly.
Speaker Change: said in the old-fashioned way, you're just working through higher-cost inventory.
Brett Larsen: That's exactly correct, Bill.
Bill DeZellum: I should have just said that. Okay. And you said you'll be working through that higher cost inventory for another one quarter or more?
Brett Larsen: two quarters
Speaker Change: Okay, thank you. And then, something that I have...
Brett Larsen: have never really thought a great deal about. But in the opening remarks, Brett, I think you mentioned Chinese business for China in your Shanghai plant.
Brett Larsen: And the question that it prompts is why would a Chinese customer choose Keytronic Shanghai facility rather than one of a myriad of Chinese competitors?
Speaker Change: that's a good point you know I think I think we offer
Speaker Change: a pretty good solution similar to how we do in each of our global locations. We have quite a bit of technical expertise for the size of operation we are.
Speaker Change: You know, if you were to look at all of the different legacy products we've built in that Shanghai facility, they're very well-versed and very experienced.
Brett Larsen: in building product and, you know, I think that's something that shows through as they're looking now for more local Chinese OEMs.
Brett Larsen: is to provide, you know, hey, these are all the types and different industries that we've built for in the past.
Brett Larsen: and we can offer similarly those type of products for a Chinese customer.
Speaker Change: Okay, thank you. And then a couple of additional questions, please. So, first of all, you...
Speaker Change: You are hitting the, or your guidance...
Speaker Change: for the
Speaker Change: fiscal quarter, the lower end of that guidance is flat with this quarter's guidance and yet you're going to have some, I'll call it catch-up revenue from a program that resumed or started up in October, another one that started up this week.
Speaker Change: or now-ish, why isn't that guidance a bit higher? It just seems either that you're being conservative or that there's something coming out of the revenue, out of the bottom of the bucket, if you will, that I'm not understanding.
Speaker Change: That's a good question, Bill. I think as you look at our...
Speaker Change: second quarter we are typically a little lower in sales and shipments
Speaker Change: just due to the holidays. I know that most of our facilities will be completely closed Christmas week, and then for half of the week in,
Speaker Change: over Thanksgiving. So part of it is just the amount of production time that's available during the quarter. I'd say we're about a week and a half light compared to what we'll be able to do then in the third quarter.
Speaker Change: So that has a direct relationship on how much in shipments we can get out
Speaker Change: Okay, thank you. And then one additional macro question. We have seen in
Speaker Change: different
Speaker Change: economic data points.
Speaker Change: that would suggest opposite things and have heard different things from various companies about activity levels picking up versus activity levels staying pretty constant. What are you seeing when you look at your broad base of customers at what's happening out there?
Speaker Change: Bill, it's a mix for us as well. I would say on the whole, I would say that we're actually seeing some recovery in demand.
Speaker Change: if you net the ups and the downs. I think we mentioned that in our first quarter actual production of legacy product was up 10% sequentially in Mexico.
Speaker Change: We're expecting that to be flat for this quarter and then an uptick again in Q3 and Q4 this year.
Speaker Change: cautiously optimistic that demand is is actually shifting a little more positive be very interesting to see see where things end up after this election cycle but for now I think
Speaker Change: a slight uptick on the net.
Speaker Change: Great, thank you.
Speaker Change: And our next question will come from George Malas with MKH Management.
Speaker Change: Thank you. Bye.
Speaker Change: Thank you, operator. Hi, Brett and Tom.
Speaker Change: Thank you. Bye-bye.
George Malas: So, congratulations on the gross margin. It's really nice to see it in bigger digits. Tom, I just want to understand...
Speaker Change: That variance that you're talking about, did it reduce the gross margin or did it improve it?
Speaker Change: Yeah, George, good question. That reduced our gross margin by about $800,000 for the quarter.
Speaker Change: So gross margin actually would have even been better without writing off that capitalized variance.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: So, that's quite a remarkable feat. And I was looking at your peers, and it seems like in terms of post-emerging,
Speaker Change: You're sort of at the high end of the peers because of smaller scales and operating Margin perspective you sort of slightly below some of your peers But I think a lot of that is related to the scale and and I think you're you're 3.4% EBIT margin is the best in over a decade
Speaker Change: So and that's despite the variance, so that's quite remarkable
Speaker Change: It seems like now...
Speaker Change: The balance sheet is improving.
Speaker Change: But you still have a fairly high level of debt and, in particular, high interest expenses.
Speaker Change: I'm trying to understand how you think you can improve your balance sheet and maybe refine it in the next year or so.
Speaker Change: That's a great question, George. I think you nailed it. I think we're going to continue to drive improvements in working capital. You've seen a quarter over quarter decline in inventory that started about 18 months ago. I guess it's now.
Speaker Change: 21 months ago. Our expectations will continue to be managed as Tony mentioned. That's critical to our success.
Speaker Change: The cost of capital.
Speaker Change: is having a significant detriment to our
Speaker Change: Our profit, as you mentioned, the amount of interest costs that we're paying on a quarter to quarter is frustrating for us as well. We are busily looking to refinance.
Speaker Change: some portions of that debt and continue to drive some more liquidity. We still feel uncomfortable with this amount of debt.
Speaker Change: Thanks for watching!
Speaker Change: right okay okay and just in terms of the in the guidance that you have for next quarter is the capitalized variance roughly at the same magnitude
Speaker Change: Roughly, yes. I would say it's like, you know, around a million dollars, yes. Okay.
Speaker Change: Okay, great. And let me ask you about, and I hope I get this right, but you have this very large power generation customer that had some design issues, I believe.
Speaker Change: and basically, I think you had...
Speaker Change: very little or no revenue from that customer for in the last few quarters. Is this customer still on the table and is there a likelihood that you resume production with that customer?
Speaker Change: Good question, George. It's a power equipment provider and we have not had
Speaker Change: Any substantial revenue from that particular customer for at least three quarters?
Speaker Change: We still are in discussions with them. They are looking at potentially
Speaker Change: requesting some more product in next season. So next season would be next...
Speaker Change: summer and fall period. So it's still on the table and I think the relationship is still strong with them. Now it's just determining whether the redesigned product that we came up with
Speaker Change: would be a good fit for their total offering.
Speaker Change: Okay, and so you were very involved in the product redesign.
Speaker Change: Yes, absolutely.
Speaker Change: Thank you.
Speaker Change: and then one final one and it's kind of a hypothetical but if you had been able to produce that extra nine million dollars from those three programs that were delayed
Speaker Change: and you assume sort of a similar gross margin and then it pretty much falls to the pre-tax line. It seems like it would have added almost a million dollars in pre-tax income.
Speaker Change: and taxing that, let's say at 20%, maybe at roughly $0.07 per share.
Speaker Change: Is that sort of a right calculation?
Speaker Change: On paper, yes, George. Yes. And what would be different in reality? Oh, I think yes. I think the incremental margin on $9 million worth of business would have equated to
Speaker Change: you know, at least another million dollars of margin. So, yes.
Speaker Change: Great, great.
Speaker Change: Okay, and then just my final question on the gross margin, being so focused on it, is it...
Speaker Change: Assuming the peso remains where it is now, is it a sustainable level of gross margin?
Speaker Change: We'd like to say so. Yeah, I think our goal has always been nine to ten percent. We just exceeded that for the first time and that I can remember and yeah, we want to continue to drive that efficiency and that profitability.
Speaker Change: The PESO definitely has helped. You'll see on our balance sheet that we have entered into some forward contracts.
Speaker Change: We're about 50% hedged for the rest of the fiscal year at some fairly high or low low cost peso Okay, so yeah, my expectation is that that that gross margin will continue to remain healthy
Speaker Change: as long as some other unforeseen event doesn't happen.
Speaker Change: okay and so that's you you remember many years ago you were somewhat hedged you had these three years rolling hedges
Speaker Change: And so you re-entered into some hedges at this point because you saw the opportunity. Yep, we saw the opportunity and at the point in time we saw the weakness in June, we started making some hedges and we've continued to do so.
Speaker Change: You know, and that's part of our business practice is to take advantage of a week in peso when possible, but even more so to be able to
Speaker Change: more accurately budget
Speaker Change: our production costs moving forward and make sure that that's included in our price to our customers.
Speaker Change: Bye, bye, bye. Okay.
Speaker Change: Great, okay. I look forward to a time when the balance sheet keeps improving and then we have a really big impact on
Speaker Change: on the bottom line.
Speaker Change: Thank you.
Speaker Change: Thanks, George.
Speaker Change: And our next question will come from Bill DeZellum with Titan Capital.
Bill DeZellum: Thank you. I have two follow-up questions. The first, relative to the Mexican operations restructuring...
Bill DeZellum: Are those activities now complete and if so, has the benefit fully flowed through the P&L in the first fiscal quarter or will it be in a future quarter?
Speaker Change: That's a complex question.
Speaker Change: question, Bill, it's a great one. You know, part of that
Koss: and ... Koss.
Speaker Change: is still stuck in capitalized variances.
Speaker Change: So while the actual
Speaker Change: Labor, or the wages that we're paying now, yes, are 100%
Speaker Change: We're seeing that improvement in our wages that we're paying. However, some of the higher cost inventory is still stuck on the balance sheet as we write through that.
Speaker Change: So, actual production costs, yes, Bill, I think those are definitely, that's a big part of why we were able to achieve.
Speaker Change: 10% plus gross margin this quarter.
Speaker Change: is because of those reductions in force.
Speaker Change: to say that we're done. I don't think we'll ever be done. I think there's always We're going to continue to look for for ways to be can to be more efficient and You know, I think the fact that we were able to
Speaker Change: to timeliness of building product for our customers.
Speaker Change: Is there some more efficiencies that we can gain? Is there some additional head counts that may not be required? So to say that we're done, I don't think we're done. We'll continue to monitor that and continue to...
Speaker Change: to compare that to the current low down in Mexico. But yes, the reductions that we did earlier in this calendar year were fully seen in overall wage reduction.
Speaker Change: That was a long-winded answer, but hopefully able to address your question.
Speaker Change: It did, and it expanded on it a bit, which was very helpful.
Speaker Change: Just to be clear, the activities that you, or cost cutting that you had originally identified, that was done at the beginning of the fiscal Q1, even though there may be more to come as you put a finer look on it.
Speaker Change: That is correct. That is correct.
Speaker Change: Go to Beadaholique.com for all of your beading supplies needs!
Speaker Change: So I'm going to try to piece a couple of things together here because I've not heard you in the past talk about the capitalized variances and so I'm thinking about the significant cost reductions that you had in place at the beginning of the quarter.
Speaker Change: And so, ultimately, you're producing product at a lower cost than what was in inventory. And so, essentially, the restructuring that you have done and were completed with at the beginning of the quarter,
Speaker Change: the reason that we now have a call out for these
Speaker Change: capitalized variances, or said another way, because you cut costs.
Speaker Change: and that was done at the beginning of the quarter, but you then had a flow-through of that higher-cost inventory. That's not a phenomenon that you've experienced in the past, and so that's why it's a new call-out this quarter, and then we'll carry it forward a bit longer.
Speaker Change: Yeah, I think the magnitude of the write-down of that capitalized variance that's one of the reasons why we we discussed it this this course.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: And is it a correct supposition that had you not done the cost reductions or the restructuring
Speaker Change: Your current inventory cost would be very similar to your prior or old inventory cost.
Speaker Change: That is correct. Yep.
Speaker Change: Okay, that is helpful. And then one additional question, and I'm going to go back quite some time now ago, but you all had at one point had a real focus on that return on capital.
Speaker Change: and I'm wondering to what degree that's entering into your current or future mindset and just would love to get a perspective on that please.
Speaker Change: Yeah, 100%. Yep, that is definitely our goal. That is what we're looking at. Each and every program is highly scrutinized. What is the amount of capital? We're not just looking at top-line revenue.
Speaker Change: We're even not just looking at the margins that's generated from shipments of that program.
Speaker Change: We're also looking at how much capital is employed on that particular program and is it a good fit for Keytronic.
Speaker Change: So we have done some trimming of some certain programs, and I would also say that we've even put a
Speaker Change: a finer filter on new quote opportunities coming into the sales funnel based off of that same
Speaker Change: KPI is what is the true return on invested capital in that potential program.
Speaker Change: So yeah, that's definitely top of mind. A lot of, you know, I think that's driven us to get there is just, you know, the cost of capital is exponentially what it was, you know, two or three years ago.
Speaker Change: Thanks for watching!
Speaker Change: Great. Thank you for the additional perspective.
Speaker Change: Goodbye.
Speaker Change: As a reminder, if you would like to signal with questions, please press star one. Again, star one if you would like to ask questions. We'll go to George Malas with MKH Management.
George Malas: Hey guys, thanks for taking the follow-up. A quick question on...
Speaker Change: and CapEx.
Speaker Change: were very low in the first quarter. They seem to be sort of more normal for the rest of the year, but I think you said a big chunk of that is slated for Vietnam. Is this based on...
Speaker Change: Are you putting capital there ahead of customers, ahead of revenue, or is that more like a success-based CapEx where if you have new customers going to Vietnam, you will spend that money?
Speaker Change: George, great question. That's actually a little bit of both. We see a customer that is headed there and we're taking the opportunity to go ahead and build out some additional capacity beyond what just that customer is going to require.
Speaker Change: We're excited for what Vietnam could be in the future.
Speaker Change: We've had some incredible success of a greenfield there in Da Nang, and seeing where costs are at in Mexico, the geopolitical tension in China, I just think it's worth us to strategically invest.
Speaker Change: in that Vietnam facility.
Speaker Change: So,
Speaker Change: You know, will the amount of CapEx that we're investing in Denain be immediately utilized by that new customer? Absolutely not. We're going to have some extra capacity and it will show very, very well to potential customers visiting.
Speaker Change: Thanks for watching!
Speaker Change: Okay, and is Vietnam, I gather, is less than 10% of living in Vietnam, but you expect you expect it to reach those levels?
Speaker Change: AHHHHHH
Speaker Change: I'd like to say yes, you know, by early next fiscal year, I think they'll easily be 10% of total revenue.
Speaker Change: Okay.
Speaker Change: Great. Good luck with everything. Thanks, George.
Speaker Change: And that does conclude the question and answer session. I'll now turn the conference back over to you.
Speaker Change: Thank you for any additional remarks.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: We appreciate you joining our conference call today. Tony and I look forward to speaking to you again next quarter. Thank you.
Speaker Change: Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.