Key Tronic Corporation

Good day and welcome to the Keytronic FY25Q1 investor call. Today's conference is being recorded. At this time, I'd 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 Spokane Valley headquarters is Brett Larson, 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. 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. In addition, the slides together with a 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 are provided in today's press release, which is posted in the investor relations section of our website. 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. 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 $9 million. 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. 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, primarily as a result of recent headcount reductions, a favorable weakening of the Mexican peso, and continued improvements in the supply chain. Gross margin was 10.1%, and operating margins were 3.4%, in the first quarter of fiscal 2025, up from 7.2% and 22.2% respectively in the same period of fiscal 2024. 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. We expect that in the coming quarters, the reported margins from improving efficiency will be partially offset by the reduction in capitalized variances. Our net income was $1.1 million or 10 cents 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. 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. 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, or 24%, for the same time a year ago. These improvements in inventory levels primarily reflect our concerted effort to drive inventory reductions and increase component availability. 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. 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 first quarter, we also reduced our total liabilities by a combined amount of $29.7 million, or 11% from a year ago. Our current ratio was 2.6 to 1, compared to 2.4 to 1 from a year ago. 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. 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. 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, while utilizing leasing facilities as well as make efficiency improvements to prepare for growth and add capacity, 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. 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, and a continued weakening of the Mexican peso. Taking all these factors into consideration, we expect net income in the range of 5 to 15 cents per diluted share. We expect to see growth in our U.S. and Vietnam production, have a strong pipeline of potential new business, and remain focused on improving our balance sheet. Over the longer term, we believe we're increasingly well positioned to win new programs and profitably expand our business. That's it for me, Brett.

Thanks, Tony. While we did not meet revenue expectations in our first quarter of fiscal 2025 due to unavoidable delays for a few programs, We are pleased to see our improved operating efficiencies and margins begin to take place. Our recent workforce reduction in Mexico, trimming of non-profitable programs, and making a concerted effort to reduce working capital are starting to pay off. 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. Over the longer term, we expect that these strategic changes will improve our overall profitability. During the first quarter, we continue to expand our customer base, winning new programs involving manufacturing production equipment, vehicle lighting, and commercial pest control. The strong pipeline of potential new business underscores the continued trend towards onshoring and dual sourcing of contract manufacturing. Global logistics problems and China-U.S. geopolitical tensions may continue to drive OEMs to reexamine 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 products, but also for design and logistics services. Over time, the decision to onshore or nearshore production is becoming more widely accepted as a smart, long-term strategy. As a result, we see opportunities for 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 longstanding, we have right-sized our operations in order to remain cost competitive. It has also become clear that our customers nearshoring from China may have a different calculus for selecting a geographic location for business. We believe our Mexico operations provide a full suite of vertical manufacturing for customers looking to nearshore their manufacturing processes. 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. For those customers who struggled with China production due to their flexibility requirements, we believe our US sites offer outstanding flexibility engineering support, and ease of communications. 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. 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. In coming years, we expect our Vietnam facility to play a major role in future growth. 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. 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, continues to build legacy Keytronic programs, and has found recent success in winning new programs with direct Chinese customers. 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. We anticipate continued increase in number and capability of our design engineers in coming quarters. We also continue to invest in vertical integration and manufacturing process knowledge, including a wide range of plastic molding injection, blow, gas assist, multi-shot, as well as PCB assembly, metal forming, painting and coating, complex high-volume automated assembly, and the design, construction, and operation of complicated test equipment. We believe this expertise will increasingly set us apart from our competitors of a similar size. 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, as well to 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. 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, and we're seeing significant improvements in our operating efficiencies and a continued weakening peso. Moreover, we will continue to rebalance our manufacturing across our facilities in Mexico, the US, and Vietnam. We remain very encouraged by our progress and the potential for profitable growth over the longer term. This concludes the formal portion of our presentation. Tony and I will now be pleased to answer your questions.