KTCC - Earnings call transcript Q4 2018

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Operator

Good day, everyone, and welcome to the Key Tronic Q4 2018 Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Brett Larsen. Please, go ahead.

Brett Larsen

everyone. afternoon, Good Larsen, Brett Officer Key of I Chief Tronic. am Financial to I joining thank us like today call. for conference everyone would investor for our

Gates, in headquarters Executive here Spokane our Craig Officer. me Chief President Joining and our is Valley

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

For you operations. other the this our on X-Ks. information, information statistical the has may more and factors review business that and specifically outlined documents filed call regarding our the we in latest SEC, Company XX-Qs note risk XX-K, will quarterly that and discuss the Please financial with historical

quarter Some released is information recorded website. of this release in on results will press our Today, XX, for year version today's our of this available fourth ended be June and call XXXX. we and a included the

For reported programs and Once million and total key our quarter. our a customers, fiscal of shortages saw component. million our $XXX.X of would increasing productivity revenue XXXX, ramp. was the We in in electronic number we the X% by from – $XXX demand industry-wide up long-standing of continued from revenue of to impacted most new fourth quarter again, prior overall adversely

for the XXXX. For fiscal year million XXXX, total million fiscal $XXX.X revenue was to $XXX.X compared

For our X%, to X.X% fiscal and XXXX. for and the margin compared fourth X.X% of was operating quarter fiscal XXXX, margin X% gross respectively, was

the with these programs facility of get production a time volumes. the has coupled to full by impacted wins. involve transferring increased production the own, Many ramp it length EMS of Our shortages, new gross margin adversely program be competitor's our up has associated costs new continued which taken with ongoing to from our to component

capacity. existing production into see our We new as move utilizing expect gradually to further programs production improving full margins gross

continue programs capacity will fit existing into also production require expect We to that new and equipment content. labor less

capital cost efforts, investments further of equipment we the programs requirements substantially As sheet operating plan and reduce a during reduced coming our new also quarters. we new will in labor Mexico production streamlining metal invest result in on that fiscal XXXX, to and in

and Our see profitable, China to are continues along domestic current In support SMT new Moreover, we're in our investing a equipment locally and be programs. our in and manufacturing further coming our quarters. leased growth, facility square and Asia Minnesota programs footage with in replacement option in continuing provides supporting these will the growth of facility Arkansas locations. profitable, expect future to sourced to increase in facilities we U.S. be facility a competitive new capacity for

$X.X income approximately million same For of had year $X.XX quarter million to XXXX, share per fiscal we fiscal fourth net of compared the or for $X.X period the XXXX. $X.XX per or of share

arbitration of For fourth the the binding share. quarter diluted expenses, in totaled with hearing, $X.XX connection anticipated per XXXX,

the for $X.X net share XXXX, share year $X.XX fiscal $X.XX per For was fiscal or or income compared million to million XXXX. $X.X per

As for the in tax reform million year. XXXX fiscal discussed, that previously expense calendar $X.X year mainly tax earlier the net the includes income U.S. from of resulted discrete

the Turning balance to sheet.

position. to a continued maintain financial We strong

end previous from our were X.X% hearing the from the the up quarter at result programs increased inventory component shipments all the a to gains in revenue results As to a receivables delays of previous of direct quarter X% quarters. or shortages, relating XXXX of fourth today Trade ramping the result new the that as due approximately growth. and the from former also with recent losses Note of presented quarter fiscal customer. any collecting of do not fourth a sequential arbitration reflect associated

made be in expect We to the weeks. the the coming of award arbitrator

former You levels that receivables our and receivable from million paid inventory will the $XX included and of due purchased recent recall have quarters customer. in roughly inventory

carrying the to cancellation contractually former In expensed, inventory other certain to but already pursuing the issue addition the costs be and reimbursement due arbitration, from we believed customer. and fees are for

the any We behind Nevertheless, us. program expected and have one-time year ultimate are financial levels during spent of come could of ramps on periods. the to gradually a the have see arbitration, line related inventory effect fourth not levels to Irrespective expect as operations or we or we $X in revenue on and coming quarter arbitration, associated could are as fiscal for new a cash accrued gains and/or position, the consolidated which million more Legal incurred. this continue results the this associated fees and for this are our with gain outcomes being outcome expensed in result which claim, flows loss. unknown delays costs of XXXX losses increasing legal addressed disposition matter results. material The with and of approximately any net future now are component in of

days expect reduced By by coming the total consolidated in We our DSOs payables around carefully the debt remain reduction our of debt $X coming compared hope million quarters. managing accelerate year-end. to the during in our prior to XX to quarters. We we year,

XXXX through to revolving capital of expenditures expect down Over full line to loans $X quarter fiscal were approximately the million, pay the term fourth we of million the longer fiscal and were credit. the year. for $X term, Total and continue

keep and recent XXXX production and capabilities. SMT in future invest wins up continue in growth. to to to in our approximately program plan molding plastic facilities, invest We We metal sheet equipment spend new fiscal million and with expenditures $X in to capital

new fiscal of to production. expect customer programs move XXXX, and quarter into first the ramp more into of we Moving our

$XXX Taking to million. of million see we in sequential expect of revenue largest first have factors addition, XXXX our In to of some forecast demand continued revenue that increased growth, consideration, ranges into the we quarter from fiscal long-standing these the with $XXX customers.

the earnings first earnings. and prospects the The This For of over revenue rate are sequential EMS longer we business summary, $X.XX tax share. also diluted of new an quarter range believe we effective win per health anticipate that me. strong, is to for $X.XX XXXX, fiscal the the assumes future are company growth, by programs to In of profitably encouraged and of earnings we continue and XX%. in well expand That's it in financial our positioned term. we the growth to overall with Craig? for

Craig Gates

Thanks, Brett.

the year, a large debt was we revenue and caused our While customer, returned XXXX base, former shortfall reduced by customer growth. the diversified significantly to replaced challenging our

fiscal in tax in several delays gains adversely collection effort the associated fourth electronic the substantial our new During key of few was and continued fourth arbitration unrelated in U.S. massive our severance shortages the the efficiency customers, costs quarter laws, Mexico, tariffs, from increasing these quarter. a a most unexpected industry-wide to business we X% corporate components. by legal reductions and long-standing demand impacted challenges, Despite in ramp. in and the the flooding with events, revenue customers, Houston, programs our number from new In our saw year, changes of total sequentially XXXX, large expenses of in grew of

Wi-Fi we quarter, video Technologies, safety. SkyBell ramp the During padded global began for in neighborhood leader a fourth and improves of home doorbell product technology that the

next profitable this expect become projected contribute ramped our new discussed long-term over our Once could the quarters, relationship largest last one SkyBell fully few base important As quarter, growth. expand customers. is to we we to of customer and

the to new competitors from EMS also significant customers. also business quarter, we During from fourth continued both win existing and

distribution of monitors, XX involving Internet equipment, the HVAC During Things for and services exercise controllers, new fiscal major home equipment signage. year, security, applications, gaming devices, consumer electronics we programs, consumers and won medical

analyze cost new tide broader of our costs. be positioned total of slowdown more and expanding shortages impacted production, the manufacturing any we're components, productivity Mexico well correctly they seeing in into is the the production the overseas lowers continued delays tariffs the to U.S. market. and inventory impact wars customers trade are the Our returning adversely in and base Nevertheless, by of threat in the one, increasingly impact the the for as industry-wide China, for time, in diversified America-based uncertainty by both North customer. key in delivery, future we of of single and raising pushing cost same At significantly Moreover, in increased customer electronic potential resulting a

results for U.S.-built appetite in production calls, of As see recent discussed facilities. growing facilities. we value and domestic having significant our domestic our We a strong the from continued we products this reflects that efficient highly believe

investments are molding capabilities While we real we in our and strong sheet-metal-centric Mexico see are SMT, and costs investments which With metal facilities, equipment less respect more of in America. efficient. carefully we lower the our plastic growth efficient each production to We're These deploying facilities, and competitors more both business. new future to few our a the are North expenses, sheet States. programs, manufacturing labor-insensitive growth managing making very in with in also make our existing enable planned and innovative of production and expected

steady unmatched business continues the of excellence of of our footprint competitors size. comparison integration, be EMS of to to other boosted sites pipeline our and manufacturing by level Our opportunities new our our multi-country vertical in

with space uniquely facilities China, increasingly is risk located our As Mexico the OEM in geopolitical uncertain equipped and manufacturing Tronic to States. offer landscape, mitigation Key

we're This express customers be and to and XXXX, for to this of honor industry throughout hard chain presentation. We're to dedication more will In beyond. our and and in questions. Moving face to revenue portion and our year, to Brett with In growth to your their expanding XXXX our continue we facilities. who processes XXXX in we my U.S. into first formal concludes about pleased trust highly fiscal our equipment work Mexico although fiscal employees fiscal facilities, closing, this enhancing to and to I continuing their quarter issues, the the opportunities our I valued to take opportunity optimistic past productive in gratitude new earnings. to now want expect for our continue supply us support. during and preparation our of plan answer profitable and your for invest shareholders we growth be in

Operator

Management. with from [Operator take Thank you. Tieton We’ll Instructions] first Bill our question Dezellem Capital

William Dezellem

start like new Thank of of think each I'd we how going of forward? size Kind do to And wins. about your what's the these? you. with them

Craig Gates

I Well, $XX the $X million all they to range. within think million fall

William Dezellem

agreement you're of is would each distribution discuss service particularly rather bit it them, little if than different, product a really a building. a That Craig, that the sounds you And services?

Craig Gates

No. That's – me that to – is yes. That's what? – notes. Brett was that trying pass product Oh, a

Brett Larsen

carefully… it Once

Craig Gates

business. Yes. is in by That's people that distribution used a the product

William Dezellem

And you Understood. medical the us tell what product can about that?

Craig Gates

from It's dramatic injuries. in and skiing and my It seen, both golf intended And never used have brain it's that. and it really cool help what to MS from injuries because recovering me it myself, things game brain people is – in people's actually I've cool. like but coordination I've help had who pretty may in helping it's from

William Dezellem

Sounds that's electronic interesting. there And is unique the story-worthy? signage or particularly interesting anything

Craig Gates

a metal-centric It's the we're seeing in has to part addition of in for products. overall steel it of lot displace and demand input devices. This

William Dezellem

And bottleneck trying to you is you, the would are is you. understand what's please, in their the not products? governor to faster asked for is on – their spirit that seeing that it for that then growing happening that are? question than what of faster, not Thank you relative And the discuss why already just And ramping SkyBell, demand ramp? but

Craig Gates

to demand we the market, strong. is how have this are, The going the we that remains to Well, shortages continue in on can and business. and about fast ramp talk limiter unfortunately, exceedingly the components electronics talked

who attempt the queue, customers to prepaid actually and get front of the the have parts. we product get can't We yet have for to in

is it. get well capacity can demonstrated excess parts factory that the of in we to feed So The limiter. ready is factory go. has to The what

William Dezellem

what's And that anticipate there you parts be? start And massive a the gradual? that presumably, to point, be mean, the more come step could I of when will anticipate it from in in. that would revenue something increase would that? I you And to magnitude at is Or have guess, a will point come you function?

Craig Gates

see unfortunately, gradual. the can it's marketplace, in we what to, going parts From be

William Dezellem

just that gradual that ramp? headed way? any that's every And is that it's it timing is Or for begin single there day to

Craig Gates

we the not of coming in XXX when XX This tomorrow, down before, up. had shortage morning, from parts that and were it'll we out probably needed on them, day or that's go and

that So electronics components through replace else mode, switching the bill our and file that running actually, them assembling of components, with a testing involves That of sure material is with. we to we're on run a business, across making everybody the regulatory of find component any as the in the agencies T&H, manufacturer part. haven't by a business, trying can component in we constant of

an it just demand drag trusts on that that by continue. it's nobody going is our ongoing the appears, caused industry, the So to this fact in business, electronics unfortunately,

people like. don't their increasing a lot build see of capacitors, we capacity So resistors, the circuits in investing and integrated to

William Dezellem

this places supposition. like which if purchased probably then SkyBell's Amazon down I that Thank major has to have we I you. And And Ring would continuing in Ring. line from competitor, questioning, Walmart our may, want buy of don't be or Costco, seen Amazon believe

guess, that? you're benefit any that not from please? you I question you demand, components, I without the seeing demand so, the can And produce understand is, ultimately able prospective address Granted, to it but aspect of are

Craig Gates

suppose, from retailer Yes. product largest as after said, from now right the no in demand big There significant of their you to we Ring a get it as purchase. But can’t And market competitor. buy is the wants result retail a as a way. you unfortunately,

William Dezellem

one shifting the arbitration. around what was additional to the beyond a And you, bit Thank remarks, please? commentary Would said in you. question, more provide that then please, opening

Craig Gates

I that you have to on. to comment so I'm could much going it I looking you for? What ask are down. narrow

William Dezellem

that not gives a or you hint any had you're indications think from way I if I indication judge, that timing And and as referenced the is or this jury, weeks. it a remember anticipating, right one have another? was – right, you some Well,

Craig Gates

And the looking is weeks recently a is that believe which So leaning. arbitrator. a communication had no him communication now. there four arbitrator. he from from from us it's recent from indication Yes, we've not a him have leads judge, around jury, we an on we're it's to somewhere way It's not had

William Dezellem

Thank you all Great. questions. allowing for the

Craig Gates

bet. You

Operator

to We Sheldon next go Grodsky will Grodsky Associates. with

Sheldon Grodsky

was well seeking counter what them? arbitration? from other Is touched upon that are you You ask, on as claims as the there you some of I seeking going money to party but money from

Craig Gates

time the answer done, that by was think to I got the we no.

Sheldon Grodsky

expenses what's potential downside upside concerned? risk outcome and So other no have been the have is as you The as than expensed already far happened…

Craig Gates

not true. that's No,

have all have to our still we our were scrap. sheet is we the that that as in incorrectly, bought inventory to that judged that So if hit inventory would balance be

Key the of the back sorry, is come I'm did say, if wrong. arbitrator you there Tronic, judge was million downside $XX if to – the – So all and you this

– that we paid all while we that roughly of On another the had cancellation what would is hand, be get we that think get well, get then our get three we million to for zero other last to $X the we between so another And hope we've deal if believe should would we to would million the fair, cover inventory. were and for years waited out inventory expenses within and we carrying paid. $XX to

could So that be substantial a upside.

$XX negative swing positive. million is to the $X probably So million

Brett Larsen

positive already flow And has any that award would for. inventory cash be been as paid

Sheldon Grodsky

you your Can mostly Okay. the anything Does say serve Asia? tariff? about China operations

Craig Gates

say can question. specific again. a was lot I that tariff, the Say your but what about

Sheldon Grodsky

primarily serve China does your Okay. the The operation Asian question was, specific market?

Craig Gates

what operation back makes today Probably two China to the our comes States. thirds of

Sheldon Grodsky

States, to okay. come does back the It

– So is okay. this

Craig Gates

times. are point, to We’ve negatives. every our do. These he's tell And I going up. the this and day And to actually what both it's troubling and positives which President on seen from you end prediction exciting going can't changes way at

when really way the So you happen doesn't tell sense goals. make to going the stated any to they're about next. can't Certainly, you it that going I it what's compare

they here States, trying does into into that untariffed. to manufacturing untariffed, to tariff and states move take steel their yet in coming can don't finished is the you States it it China So goods you finished for pressure to because goods example, but buy if you're ship into OEMs manufacturing tariff the steel put all to the more China back and coming the

to this So the was purpose. first counter next. step the to But in stated going who exactly in result what's knows happen

Sheldon Grodsky

Has to your organizations…? House? work directly through communicated the do you Company Or trade White

Craig Gates

of upside House. communicating Yes, on organizations, or we the White downside and trade work I have comment no with the through

Sheldon Grodsky

Thank Okay. you.

Craig Gates

Okay.

Operator

go with Nouredini BBN [Operator Bobby Management. Instructions] We’ll to next

Bobby Nouredini

that Hey, the Mexico on year guys. total? operations. related severance to What for the in Question the was

Brett Larsen

XXX,XXX. It USD was roughly

Bobby Nouredini

notes here? that something about in off? out. this So My say totally they're help $XXX,XXX is I Or $XXX,XXX QX. QX and me there just Am missing in figure I'm

Brett Larsen

wrong. be don't doing I the math $XXX,XXX. may the recall I

Bobby Nouredini

Okay.

So you miss years. I over And of year. the let’s recall go that little earlier. saying expenses then of last that the Did and right? did hear $XXX,XXX $X associated bit I couple were arbitration, with with the for I about a the call there that's million in

Brett Larsen

the within year. That’s last

Bobby Nouredini

year, last the Within okay.

$X So the severance, year the within million and okay. then last on $XXX,XXX

Brett Larsen

a this math if the a in going that to the the weren't of little towards, bit to in surprise. previous you million about you may Well, at we little heading million I'm look $X.X think be legal We I had $X had you over with help tax previous year, year. expenses year

$XXX,XXX So $X.X there's million to $X.X another severance. to million. Add $XXX,XXX in

that up ends going in than that's about, the were If $XX profitability better previous the have less on saying for. year what numbers revenue. been that million year So a year this could you

Bobby Nouredini

Yes, so make same that that is want that in post-tax? $XXX,XXX we're to severances on – the to just sure page, pre $XXX,XXX or is

Brett Larsen

That is a pre…

Craig Gates

pretax. That’s

Bobby Nouredini

it. Thanks Appreciate guys. Okay.

Brett Larsen

You bet.

Operator

with next Management. Melas We’ll go to George MKH

George Melas

afternoon. Hi, guys. Good

Craig Gates

George. Hey,

George Melas

little bit you SkyBell, could how it's On guys big fully be if you sense give for that of us of customer a can a ramped?

Brett Larsen

up have to we already XX% think stated I it revenue. that of be could our

George Melas

and of that – Okay. probably demand revenue? And you the that fulfill, XX% should now, that that we that get something Is on time? cannot – right are on was over there you based should demand have at – you

Craig Gates

close in are to XX% no way revenue. of We

Brett Larsen

to if time we market was can – up than can there And less get that. was it it way the only parts enough to over get catch Yes, demand. hopefully, we

George Melas

now? jump to able would parts, it the If up to get you were XX%

Brett Larsen

Yes.

Craig Gates

it. beat It would probably

George Melas

one products? it of And family Or product? that a for Okay. is is

Craig Gates

It’s a family.

George Melas

and then on the missed And a little, Okay. the question profitability in on, a quarter. I

but I main want is what the been? internal be on what might commend want the of shortage. exceeded knew quarter, bit culprit? seems worse profits, it own during that revenue your get have of it see, quarter? And I of the so that. think it particular I a that – think this to would I that profitability I But progression was was I revenue you What you like to wondering part just lower. I'm to missed your just and a say, I you Did sort you there expectations, guidance, want the it made think and

Craig Gates

are was to paying more so shipped. It you get end – get here. get arguments to parts Customers, fees the worse, parts are we're immediately in with expedite so fee, meanwhile, order having products the continuing them. have to loathe agree to And to up in and can as imagine, you you expedite big

stuff bit price a And So SkyBell and at it an you're word then what's manufacturing than money immature what moving a buying I can say quite of on into making mature. spent we to intended a process factory it on higher money for. of quite we bit here, the right on – our you buy spent

George Melas

it is right mature pretty And Okay. now then? Or…

Craig Gates

same in Yes, close per what matching per run And is scrap had we – level now and to at they it's down be terms up to thought time. unit. to pretty thousands the and routings have week, the reasonable the a capacity we of the man-hours should thousands are

George Melas

U.S. SkyBell in just the Mexico? Or in Okay. you Mexico? and manufacturing are in And

Craig Gates

Just in Mexico.

George Melas

of of bit Thank Mexico plants what and is contribution revenue China the from the you a sense product us roughly. a from give so you. Can in little

Craig Gates

the ask pretty I Did have versus from – you what Mexico you you Did revenue us China muffled.

George Melas

geographies, yes. the three On Craig.

Craig Gates

something I – you. geographies. hear get didn't I about couldn't

George Melas

sorry. so is that revenue. three It's geographies from am I the the

Craig Gates

geographies. three Got

Brett Larsen

XX% numbers, we're roughly so China. XX% Mexico, rough and just XX% U.S., Yes,

George Melas

U.S.? does keep look the Does how And year? Okay. growing? next Mexico that Or

Craig Gates

closer ask White House, why You're don't the them? go you to

George Melas

Okay. Thanks that. Craig, for I appreciate.

Craig Gates

Thank you.

Operator

question a Dezellem with We will Management. follow-up from take Tieton Capital Bill

William Dezellem

heard guidance, range quarter, moving low what you into of of you the Thank comments end the lower that should please? matching we're on the quarter business earnings you. but maybe the what as address won't you we seems correctly, since and half The about revenue if be you your the me, is through you I way in SkyBell you basically – expenses that the this the with end though, already ramp, actually matching quarter, of did should the the range is costs factory. unless want just first happened because to issue extra expenses have the it follow-up here quarter. this this half did given low for have Would SkyBell your

Craig Gates

Sure.

of having ton a, during happened for already and parts getting quarter; money a half first it SkyBell. of So to we're b, spend the this

and with is to when have should trying we it cost or not demand you and got strong whatever come four the more crew like We're And ramp to a the starts from going build spend building going to say, on. yes, companies Fortune can it's XXX I've in So next it. stops. of the the first than weeks skeleton it months parts in, us so you

next to all I'm out three factory week. go for the then sit down another the and is going say, to your yes, and going have put crank and three days, on You in ships stuff it

to the like but battle So so parts, we've retrained. a people us. get forget and got the Mr. to like friend won we Yes, the those come build our to is again between for Trump and feel going it back good not sound and hate but whiner, they then war I all how

William Dezellem

Thank you.

the me shortages the what Let did And of cost you just other on the questions issue. quarter, and dollars. will down actually September of component that in number be June a quarter? hit anticipate just you? what in continuing couple In that And component do terms

Craig Gates

year, expensive really to through go variance. on bank purchase put that for the insidious number so quarter, as manufacturers hard price It's in all different on us costs contract ways. getting through some a many the Bill, is but PPV way because that, me A it they

list days add the price then engineering have so And fee from that of all that not these to least the to all to because you are the that's any airfreight and So expedite strength, get gone. negotiate time. component, fees and pay of you getting you have position us a can't to a at

wouldn't it, you giving number. calculated haven't I feel at I comfortable the So and a guess

William Dezellem

expedite the you expense expense handy? unusual the – quarter have an expedite in number Do

Craig Gates

No.

William Dezellem

so from the cost expedite Would me expect quarter, is to an if September is because that you and ask that? and SkyBell? all or it Or let And the in increase, shortage it does you hold otherwise, that of that same more aspects, is qualitatively. increase component – than solely

Craig Gates

No, it’s stay across it to we continue the get and and at maybe board bad least as to expect worse.

tests For qualifying an actually example, we some just time. spent years half and find the all We assemble of bring to some engineers run that have and anything the this. to old last the with week It's them had stuff, whole and still and then our that's were to going seen prove parts and in diode. them XX amazing. on of suite like usable, through a just replacement they a a None were that parts market, in us

William Dezellem

built course your correct? of that’s guidance, And Interesting? into

Craig Gates

Yes.

William Dezellem

China I trade And Mexico to And Great, or did you in thank this whether deceleration of either seeing come of acceleration it from want manufacturing are to then conversation. elsewhere? issue be you. or to back movement any

Craig Gates

Most, as I which tariffs discussed way is artifact introduced, being bizarre the earlier. are the a of

William Dezellem

Right.

it's cases other And is are otherwise movement more seeing And in have? more where where manufacturing cases happening of so slowly? quickly the – you than manufacturing happening would

Craig Gates

because the production of examples to to Mexico tariffs. have we're States where out actually out China of of China We moving and the

moving us examples to customers China other existing suppliers in have Mexico. in production other of from We

that can't to standpoint an a a fashion it's how being and see understand logical just from really engineering just sense. a concept agree we done. it's field, So makes but do I really in what it I whole from should that with the is be logical standpoint, level it can't playing annoying

William Dezellem

you. question I lot the And more you both to directions. detail, hard answer see going Thank it’s of kind when guess with a

End for Q&A examples. of providing thanks So those

Operator

further over queue, to closing With additional to I like Gates remarks. would call turn the Craig no in or back questions with any the

Craig Gates

I to Okay. for with you a call. speaking have in next and quarter, Brett thank I’d good today's like everybody again participating day. forward and conference look to

Operator

your does thank today's This conclude We you for conference. participation.

You may disconnect. now

Key Tronic (KTCC) 8 Aug 182018 Q4 Earnings call transcript