Key Tronic Corporation

Good day, ladies and gentlemen, and welcome to the first quarter fiscal 2023 Keytronic Corporation conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brett Larson. Please go ahead.

Thank you. Good afternoon, everyone. I'm Brett Larson, 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 Spokane Valley headquarters is Craig Gates. our President and Chief Executive Officer. As always, I would like to remind you that during the course of this call, we might make projections or other forward-looking statements regarding future events or the company's future financial performance. Please remember that such statements are only predictions. Actual events or results may differ materially. For more information, you may review the risk factors outlined in the documents the company has filed with the SEC, 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, and a recorded version of this call will be available on our website. Today we released our results for the quarter ended October 1st, 2022. For the first quarter of fiscal year 2023, we reported total revenue of $137.3 million, up 9% from the previous quarter, and up 3% from $132.8 million in the same period of fiscal year 2022. During the first quarter of fiscal year 2023, we ramped up new programs from both longstanding and new customers. While constraints in the global supply chain continued to limit production, we saw some gradual improvements with respect to lead times of certain key components. During the first quarter of fiscal year 2023, our results were impacted by storm damage to our facilities in Arkansas, which reduced revenue and gross profit. We have received initial insurance proceeds to repair the plant and replace equipment, which should be completed by the second half of fiscal year 2023. And these initial coverage amounts, net of equipment book value loss, are included in the reported gain on insurance claims during the quarter. For the first quarter of fiscal year 2023, our gross margin was 7.6%, and operating margin was 2.4% compared to gross margin of 7.6% and an operating margin of 1.6% in the same period of fiscal year 2022. The gross margin in the first quarter of fiscal year 2023 was adversely impacted by the storm damage to our Arkansas facility and increased labor costs in both the US and Mexico. While profitability is expected to improve in coming quarters with increasing expected revenue, higher interest rates on our line of credit and increasing wages will limit a portion of that expected improvement. For the first quarter of fiscal year 2023, net income was $1.2 million or 11 cents per share, up from were 7 cents per share for the same period of fiscal year 2022. Turning to the balance sheet, we continued to maintain a strong financial position. Despite the continuing production delays due to supply chain problems and the continued rampant transfer of new programs, we ended the first quarter with total working capital of $185.8 million in a current ratio of 2.1 to 1. At the end of the first quarter of fiscal year 2023, our inventory increased by approximately $26.2 million, roughly 18% from the same period a year ago, reflecting our preparations for significant growth in coming quarters, with much of the inventory increase being associated with the previously announced large outdoor power equipment program. While the state of the worldwide supply chain still requires that we look out much further in the future than in historical periods, we continue to carefully balance customer demand and the likelihood of successful bringing in parts in time for planned production. In future quarters, we expect to see our net inventory turns slowly improve to more historical levels. At the end of the first quarter of fiscal 2023, trade receivables were up about $12.6 million. from the same period a year ago, and our DSOs also increased to about 91 days, up from 83 days from the same period a year ago, which reflects timing of shipments to customers with extended terms and some delays in payments from customers who have been impacted by pandemic-related slowdowns and restarts in their respective markets. Total capital expenditures were roughly $2.5 million for the first quarter of fiscal year 2023, and we expect total capex for the year to be around $9 million. While we're keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production equipment, S&T equipment, and plastic molding capabilities, utilizing leasing facilities as well, to make efficiency improvements to prepare for growth and add capacity. Despite the ongoing disruption from the global supply chain that will continue to significantly limit production and adversely impact operating efficiencies, we are expecting significant growth in fiscal year 2023. For the second quarter of fiscal 2023, we expect to report revenue of approximately $140 million to $150 million, and earnings of approximately 13 to 18 cents per diluted share. We're working closely with our customers, key suppliers, and employees to minimize the effects of delays attributable to the supply chain constraints, higher costs of labor and component costs, freight and logistics, and limited availability of key components. While our facilities in the US, Mexico, China, and Vietnam are currently operating uncertainly remains to the possibility of future temporary closures, customer fluctuations in demand and costs, future supply chain disruptions, and other potential factors could significantly impact operations in coming periods. In summary, we continue to grow our pipeline of new sales prospects and continue to increase our customer demand to unprecedented levels for Keytronic. The overall financial health of the company appears strong, and we believe that we are increasingly well-positioned to win new EMS programs and to continue to profitably expand our business over the longer term. That's it for me. Craig?

Okay. Thanks, Brett. Despite facing continuing business challenges of worldwide component shortages, transportation bottlenecks, and increasing labor costs, We're pleased with our growing revenue and earnings during the first quarter, driven by a successful ramp of new programs and our expanding customer base. During the first quarter of fiscal year 2023, we won new programs involving auto, electric vehicles, automation, and power distribution equipment. We're also preparing for a significant ramp in production in our Mexican facilities for the previously announced program with a leading outdoor power equipment company during the second quarter. Once fully ramped, this program alone could contribute approximately $80 million in annual revenue. Global logistics problems, the war in Europe and China-U.S. geopolitical tensions continue to drive OEMs to examine their traditional outsourcing strategies. These customers increasingly realize they have become overly dependent on their China-based contract manufacturers for not only product, but also for design and logistic services. As time has gone by, the decision to onshore or nearshore production has become accepted as a smart long-term strategy rather than a knee-jerk reaction. As a result, we see opportunities for Keytronics' continued growth. As we have discussed in prior calls, We built Keytronic to be the ideal solution for customers as they move to respond to geopolitical pressures. As you know, our facilities in Mexico represent a campus of 1.1 million square feet in Juarez, most of which is continuously located in nine facilities acquired over time. Our three U.S.-based manufacturing sites have also benefited greatly from the macro forces driving business back to North America. Moreover, our new Vietnam facility continues to increase production levels and the abatement of COVID-related government restrictions in Vietnam is allowing us to travel there and tour the plant with potential customers for the first time. Our Shanghai plant has added capabilities in management, staff, and systems that allow it to serve Chinese customers directly. Shanghai has replaced the business that we moved to Vietnam And our procurement group in Shanghai, which serves the entire corporation, is critical for managing the supply issues that cripple many of our competitors without boots on the ground in China. The combination of our global footprint and our expansive design capabilities is proving to be extremely effective in capturing new business. Many of our large and medium-sized manufacturing program wins are predicated on Keytronic's deep and broad design services. And once we have completed a design and wrapped it into production, our knowledge of our program-specific design challenges makes that business extremely sticky. We also invested in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection, blow molding, 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. This expertise sets Keytronic apart from our competitors of a similar size. As a result, a customer looking to leave their contract manufacturer finds a one-stop shop in Keytronic, which makes the transition to our facilities much less risky for them than cobbling together a group of providers, each limited to a portion of the value chain. In recent years, the pandemic and supply shortages have constricted both our top and bottom line performance and obscured the amplitude and velocity of the growing wave of new business. Nevertheless, the fact that we are achieving record revenue in the midst of continuing and unprecedented supply issues is an indicator of our growing momentum. Moving further in the fiscal 2023, the headwinds from the global supply chain continue to present uncertainty, and multiple business challenges, but do show some signs of abating, particularly with respect to the recent price stabilization for some commodity components. At the same time, these price reductions are offset by increasing wages at our North American facilities. We believe global logistic problems, China-U.S. political tensions, and heightened assurance of supply concerns will continue to drive the favorable trend of contract manufacturing returning to North America. as well as to our expanding Vietnam facilities. We see the potential for significant growth in fiscal 2023 and beyond. This concludes the formal portion of our presentation. Brent and I will now be pleased to answer your questions.