KTCC - Earnings call transcript Q3 2022

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Operator

Good day and welcome to the Q3 Fiscal 2022 Key Tronic Corporation Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brett Larsen. Please go ahead, sir.

Brett Larsen

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

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

of quarter year XXXX. reported $XXX.X same fiscal of third up total period million in the from million, $XXX.X fiscal X% For of the revenue we XXXX,

For million, the XXXX. $XXX.X X% XXXX, fiscal in the fiscal million up of same the period from revenue was nine first year months total of $XXX.X year

we next in the demand programs, power leading our a Our global new to quarters, first program higher, be In ramp company sales supply issues. of has constrained of announced in number year. including chain increased year-over-year expect Mexico half and the but with have coming equipment of customer the by been a even production continues previously fiscal and facility a transportation

were part factory quarter of downtime fiscal and results again by impacted intermittent expenses. third supplies, During overtime year XXXX, the our

in been six government-mandated Shanghai, facilities closures mid-March. closed our for for have addition, In weeks since COVID China,

we expect shortly. to operations resume However

our per a pace to related expect periods. operating specifically gross was from in continue in review margin improved at Despite third slightly year and margins these quarter fiscal during X.X% margin totaled whistleblower for year's a of our complaint costs of was up of margin fiscal similar year approximately period potentially Additionally, gross we legal X.X% XXXX. margin SEC's of the cost last X.X% headwinds share and XXXX we to same the $X.XX operating quarter the legal our and of coming X%,

XXXX the fiscal For $X.X XX% third from share, share was of million XXXX. year or per quarter period per $X.XX of or income year $X.XX $X net the million same fiscal for up

$X.XX of interest share the XXXX. first of year or per the $X.XX XXXX million net a legal expense. expenses predominantly $X.X fiscal per and $X.X nine higher compared share increased to result is year-over-year million change fiscal For months income for The of year or was period same

COVID third approximately to continued supply transfer ramp position and to managed the continue a of by programs. Turning to financial $X chain We strong prior production sheet; fiscal in the and despite of XXXX million lower year quarter delays the maintain balance inventory we from quarter. related and the new

production. more from bringing we in late receivables were In the historical requires historical future The net the trade demand worldwide about to much quarter, We parts timing in improve are now likelihood further of shipments quarters, of future we the time expect the the of carefully quarter. million the turns inventory reflecting see prior slowly planned end third for periods. quarter, our to At the up the of levels. that state customer $XX.X in successfully out and in chain supply than balancing in look

a chain minimize some For will and make supply and for the to our of were revenue working $X.X months by and customer the to who We share. markets. approximately a expenditures for capital growing and careful in also million and year We're for the sheet significantly payments of had our working pandemic, fiscal facilities fiscal of report from for approximately molding demand availability operating be increased and from about costs million were Overall, of the to to impact of components. per of prepare earnings in diluted COVID-XX $X China-based limited fiscal eye global year as fourth ongoing keeping quarter. prior expenditures on We're production also the logistics to our adversely we current efficiency days, to capacity. some and XXXX. X.X-to-X, as disruptions the restarts facilities to impacted around the the increased slowdowns Despite invest pandemic-related to about first balance delays capital growth quarter XXXX, DSOs with of share that SMT XXXX, respective full effects up issues plan continue nine equipment million million. continued continue slightly to we the and add the our Our equipment, $X.XX freight of to ratio from capital a which and to reflects $XXX key $XXX quarter $X.XX and million both capabilities and total expect attributable improvements production our customers, during our expect suppliers XX timing shipments efficiencies, customers per employees of Total expenditures during selectively plastic well we and global backlog, key delays $XXX.X global in in expect and limit closely particularly

of coming continue to are closures, factors facilities demand costs, disruptions facility While Mexico Key the periods. the financial significantly demand COVID-XX our In our third quarter disruptions for uncertainty Vietnam the expected pandemic to operating soon, that supply fiscal Despite in and future for fact in customer could and beyond. impact our the during we and is in to prospects and the risks remain the supply in exists increase operations year rapidly by encouraged are prospects chain sales chain periods, Tronic. we of that levels the to continued future health business coming our temporary environment in the grow unprecedented impact other changing overall programs increasingly growth during customer and our our future longer to EMS And potential and we we summary, well the That's to for appears for new profitably me. new and continue reopen company to strong. China business positioned pipeline believe over are our fluctuations it continue The expand term. the possibility and U.S., currently to still as to that win Craig? of

Craig Gates

Brett. Thanks, Okay.

While chain new the of the pandemic-related pleased with our shutdowns, customer we the and we're supply base and in quarter headwinds worldwide XXXX. from expanding continue ramp challenges of fiscal third to face programs stiff successful

supply quarter, parts. the During the production persistent the shortages components, third key for we caused the face been electronic worldwide driven for have industry demand short-term. and customer in timing chain revenue shortages not transportation of extended not in significantly to issues, supply to Unfortunately, have the quarter improve particularly These costs chain triple. continued burgeoning million. for excess would believe of $XXX it in disruptions expect the do to Had the supply third we

the contract a some the manufacturing trend Ukraine of concerns labor and America. costs industry-wide with heightened supply shortages. problems, of logistics to China-U.S. same in geopolitical struggled At time, of sites staff at continued and production part the about of shortages concerns returning to increasing war favorable also tensions our North as labor global and drive We

fiscal quarter third RFID, year the and recreation, electric new mobility we involving industrial During products. XXXX, outdoor won of connectivity programs

contribute year which from footprint, for to revenue. world's not recall new to expect we the will leading fully chain which without companies, manufacturing is the and and a designed $XX We XXXX, program you begin announced be could ideal ramped, as in solution one multi-region of As million previously programs power QX, approximately first in customer equipment annual of the many have our capabilities design once we fiscal our significant our supply would win issues. quarter won with to

the in new Moreover, third from facility quarter Nang production fiscal big U.S. at During facility future. our production expect our we to facilities. Da grow in Vietnam our increase XXXX, continues across we saw the an and of things based Mexico-based and both

discussed grow foreseeable less production for the those in North supply U.S. increase the We China between as on companies and base a million driven on increasing costly. a Asian for particularly less to programs has significant into overconcentration to in needed everything our and Key our remained ideal million. onshore production no answer supply with lessen intensifying business. U.S., of Asian have concentration pressures end risky we chain we America, to $XXX weakening easy, tensions North believe to tariffs, dollar. provide make supply $X diversification As American and customer very range the costs of and Tronic emerged to to and factors their for Asian Demand political previous market continues with These calls, to powerful. time

solution geographic markets low-volume provides volume local to sources products for low-cost with close companies higher set products. Our both for sources and

We the to transfer that companies production of a have also services and an a control. more to to concentrated lost capability. companies been our have site, with likely the production Asian who no have move overly are can hence by enabling engineering longer those from We source and facilitate attract engineering competitor providing smooth that design

can time process imaginable. Our of in after onboard staggering product array cost for Moreover, vertical custom involved any and about lessen a integration transfer. the we developing products, decade a risk, can the just of

IP partner an can our all and trends have on elongated long-term. of surrounds still of the for continuing pleased into more time, now to events customers cost their formal appropriation This the both of the availability, their to At our quarter the The and design recent These be portion on challenges chains to see the answer these factors. our appropriation the your same on supply partner. of the concludes market to over who to fully I risk components many the the and XXXX, believe force minimize force an continue presentation. attractiveness should cost uncertainty will and concentrate chain can they IP and pandemic. our Brett supply disruptions the any continue continue carefully with the that of chain control supply capabilities attractiveness significant the impacts these degree power of doing key will Moving macroeconomic fourth to to recognize and global risks weigh threat of questions. companies the and outsourced significant the one outsourced the to risks growth which business fiscal and availability, to we their region

Operator

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

Bill Dezellem

Thank you.

referenced me What's with the start you Congratulations size that that you each won. of of the new Let those? programs on four that.

Craig Gates

and two XX, five, two.

Bill Dezellem

for just end end in two SEC weeks in at of high the costs with revenue came there. that let's range you quarter, you. of talk high spite little led what Thank down then Can range being a of in the in quarter Shanghai and that the about you the And locked quarter and bit please? $X.XX the kind of the of success, to the happened through EPS talk of

Craig Gates

little while war Ukraine a here of effects was there, chain had for here. had that impacted Well, thought getting better or we and almost the the parts we supply a the

able we and what closer we're capability a little So better our build. terms to bit of in wanted to to had what the get customers

if a we're So and things our that becomes things way of we will things a to we parts, If start good. things understanding. And happen for and good. look position can can we will get we can look pretty get at our a as profit, And profit that lot will are parts, up of really to if a good basic get that's revenue that look good. parts, inch lot leveraged

Bill Dezellem

is quarter. your note, QX guidance that on third to from be the And down

lockdowns? that the What's component that the quarter? the due here? demand temporarily including is it this Is Is due is lockdowns? So weakening to availability, in dynamic customer to

Craig Gates

demand not weakened. lockdowns. It's Customer and has parts

Bill Dezellem

this component the is new continuation will, so a the of – seeing you sequentially? change, margin at the And primarily same? are it's And be problems really the lockdowns would you or if

Brett Larsen

No it's both.

for logistics new a shut while. causing issues are And is problems. that that factory it's are causing lockdowns down are the So problems. that There components there

Bill Dezellem

That's helpful. Okay.

in anticipating issues how then. this What's alleviate envisioning quarter? that not like ramp. ramping mind, you're dynamic So that's business yet, chain the June that quarter in quarter, improvement? to new going are I hampered, September but the first with and And it supply the So is is meaningful are between now allowing a that you suspect it the sounds

Craig Gates

this rest And its issues number chain have by to supply out to components The are us. products. coming a specific are of of States components all product the and happens the fabricated being of the

of shape other on today a we normal better than number products. than in are we're So what

Bill Dezellem

Craig, sounds So that's Are what kind if that have you like do potentially million million, a get here actually point? and be quickly If able you – the quarter? million see let's it might $XX million business just could you to a from ultimately, that be of $XX work a little components how quarter. bit. that math confidence the to And $XX have when that the to $XX ramping actually said, you do we we to more ramp this

Craig Gates

somewhat going to strong of QX is should be QX in middle go and product. as ramp product the seasonal it very to end it's and and should That a into very quickly

Bill Dezellem

infer of in could that to according you're QX may December that So now approximately that from million the what one $XX piece that I that know thinking the you quarter? business be

Craig Gates

Well, hope I Bill. [indiscernible]

Bill Dezellem

Understood.

that from a maybe number's between and looking now at of $XXX starting that are then. a We is so bit or little a quarter to million north million And nicely point of so could in $XXX up be December able revenue? if move roughly we

Craig Gates

It saying at these plus. could we could get be That's why be. all $XXX discussions if million keep at parts we'd that we

Bill Dezellem

you in And one your operating opening remarks the Understood. step to going leverage referenced take in I'm business. the this further

what good that with about would there Is that that that relative we're there's that. from the hamper revenues profitability that quarter comes – So wouldn't discussing to additional leverage? normal December here anything

Craig Gates

so. the the risk. is I But think don't filled again with world

tell So happen. what's you I sure can't to going for

Bill Dezellem

and appreciate of time. I thanks sure. Well, plenty the for We've had But understand. the for unknowns perspective, I

Craig Gates

You bet.

Brett Larsen

Bill. Thanks

Operator

& Associates. from comes Sheldon Grodsky question Grodsky with next Our

Sheldon Grodsky

afternoon, Good everyone.

the of level do tough March on chain think much it's normal you supply to let's the used levels the than would issues but were you today's be of a follow-up know at I last if me Let say, round in what levels, business have questions. quarter? rather how hypothetical, done, considered

Craig Gates

this been normal, $XXX issues would If year. supply been have all have million running chain we plus

Sheldon Grodsky

Okay.

as best looking more Do year you a optimistic? moment things clearing you've fairly remember about kind a of there about I there's or normal. mean, I be sound been supply of unfortunately, us you talking one pessimistic chance you're things could think that information long have you any the supply on had been now were these that back still you hinted pessimistic Do up. like So of for my you've and you sources chains that's a to sense? normal world too in being But chains. in as where

Craig Gates

there be There's in congestion – this no a back normal time and at there factory It the in long rights is raw way a looking logistics, my to that so year year. world be than in will mind, could is pent-up trending more we're materials that direction, before itself. but a much

Sheldon Grodsky

the floor. let I'll take someone Okay. else

Craig Gates

Thank you.

Operator

Melas We'll George take Instructions] question [Operator with MKH from our Management. next

George Melas

guys. Hi

Craig Gates

Hey George.

George Melas

Hi. A question inventory. on

on you progressively little you what's you your what situation start that guys to to time. You inventory color inventory of try in said period and now? turns and more remarks your us Can of to sort increase expect increase a give right bit sort a to over of expect

Craig Gates

much. we have too Right now

to expect better. it get We

that the to as is probably $XX as behind million quarter, two this quarter. went the prior past million into every $XX for our but Sorry, the been much to that by we've we quarter beat forecast last as missing years

by $XXX build we'd mean, out and building we'd million. we're $XXX up thinking So million start end to that, going I

make enhancements systems. to our forecasting things. we've systems We've to and our MRP two able some been So done pretty cool

part a in We more with have our of partnership face. situation suddenly the on they our in can't XX available so won't that been been we've customer's buy in that customers to last hopes understanding able Tronic in work And the will marketplace. conjunction we able scenario that bottom better Key become the to the use XXXth and understand those parts with of that go

about end said, those So a find another probably, step to up XX quarter. have trying customers I the as we $XX of at we our missed purchase indeed we through go large if to the quarter, signed the them And components. as we there's number world bought up of the last have million start $XX that of in around to part. chase the we parts probably in and hopes million that's But from risk freeing

year-and-a-half and commitments our effort fruition give many So that make us to going two us on education And Also, years. has look needs the of support do they're done and have production having to had impact against convinced to last come to and been has process out our a our inventory customers a firm future. to two going customers so over can we big them. try that's order in their understand the to what an we parts have the is that years in to

beginning we're we were and going better getting actually So what of quarter we the the delta to what end between build of versus quarter on thought the we the built.

in expected steady had So the would I if the was inventory steady quarters. over if coming some next reductions nice world pretty in state state, – I have

pretty has into hopeful we this said aspects it quarter happen. worse sorry we three outlined continue As really entered the what like was a that's know a much to state operate. I've call, world going will the to word that back I'm that in hell those is But still every just don't ago, than

George Melas

now your you purchased inventory that's customers? hold been actually much How do Okay. by

Craig Gates

million – I think $XX the number; Brett was million? about $XX

Brett Larsen

Yes, we're in at million this excess $XX of point.

George Melas

Wow.

numbers. Okay. Those are sobering

Craig Gates

them certainly They sobering to looking with. when begin at were we're

George Melas

Right, right.

this plant the China Shanghai be plant, what versus what's On sort you you during of the EPS to situation estimate the the forecast? operational of shutdown, quarter quarter the impact were whole the can in sort the if

Craig Gates

whole better $X.XX have if our that into I know, had factored or they don't probably, the run $X.XX We quarter. It's forecast.

George Melas

they're Bill's year, the the half is a a equipment from there in think an different expect I power margin being paying working of then sorry. customer that's Maybe that's follow-up sort ramp-up on I'm customer? that of the this? profitability just the question more things somewhat calendar corporate for perspective on And because – on average customer expect I'm a do like do to the mean, capital specific, X% or like Okay. you second themselves. you But too gross X% customer of on I

Craig Gates

Yes.

forgiven. specific too you're being and You're

George Melas

get. That's answer the I only

Craig Gates

it. That's

George Melas

Okay.

Let me try another thing then.

to margin of expensive, expect you freight disruption a XX terms disruption there's XX margin in to to X% overall, Do in get gross is gross expensive, schedule. you have production next labor more back is the months? Just in the to

Craig Gates

Yes.

Brett Larsen

Yes.

George Melas

to back X% to what margin? happen needs you for get to gross And

Craig Gates

answer simple The is revenue.

George Melas

even Okay. get seems gross the it like revenue, of because chain us to the but it's likely the thing But disruption if don't the supply one get revenue, of is margin you you'll it's impeding that's seems the really leverage it more now? most operations the the

Craig Gates

get at were I and don't the was up if current ugly, problem what's or everything run have XXXs I run above well still should don't coyote things to to ugly, going the think or level, things revenue be we continuing the to we to X%. Well, up running are and know continuously, happen. the we XXXs up into And any But if jump X%. able getting if to

George Melas

are Okay. These different gradations.

the the now? is U.S. to And it a a But regional profitability it similar from from of compared look Mexico, you business. there Vietnam, of is biggest weakness part perspective or pretty course, you Okay. China, if look of and at just U.S., areas is at some right Vietnam if perspective,

Craig Gates

grow almost encouraging. this the any And by facilities growth since of first next pretty we've months with we XX XX%. seen group factories over actually is time The It's will them. significant bought U.S. that the

be and from wounds to shy evidence North built That people gone gun now direction. and used we and which to get of really much, as too a when that's everything much nursing other bringing offshore. to easier lot process back concrete talk sales business of far been have smoothing has trying become people else convincing a about their volume having low the America about to parts medium So correctly becoming piece

keep is had healthy. actually it to at very if looking the as in is looking to can for of looking which been past more it ugly the for as said than is just Vietnam And business be facility. profit-challenged now Juarez business past better good. we I been China So facility, in good. that able was that part land The the we've looks China China earlier,

we be no way all can't So just a where and parts, in can we're if we at fun. fun. would kind parts get resembles get this it point of Unfortunately,

George Melas

your for Thanks hard work Okay. guys.

Brett Larsen

Thanks George.

Craig Gates

a long-term investor. for it. We being Thanks appreciate

Operator

We'll take Capital. our question from Dezellem with Bill Tieton next

Bill Dezellem

and comments you Thank that before and those was thank the you for discussion helpful.

an this that quarters ago in there's with I was start year which quarter me about I line in last item, ago assets, other anything growing, here? but Other, its number? just to Brett, question a $X.X it's $XX.X or million, the million, may. the if $X.X And Let long-term accounting two discuss what's there been million. interesting is behind think quarter

Brett Larsen

look No, a me I portion long-term the have – I'd asset large give you other details. to think another further question? at that a of If minute? have Could you

Bill Dezellem

up certainly can rest I question. another

Craig Gates

[indiscernible]

Bill Dezellem

Thank you, it. Brett. I appreciate

seen So relative you into have et current China, that it already appropriate just cetera, or incorporated problems? lockdowns to in and Shanghai, lockdowns those of is anticipation be hurt by have deliveries all component guidance the

Craig Gates

to already We're we're or them. factor every shipments from that tried seen in get have sure don't – that we We've we've not. not day, know they're only but spreads city continues if and going the when city. enough in, to we actually shipments factored to We not delayed, and delayed lockdown

Bill Dezellem

to to assumed didn't of specifically but I start it just not point, up enough seem show it's Understood. long impacting this heard and it any be company logical that up, me. had time, saying six to would weeks them would we a have other

Craig Gates

Sorry.

Bill Dezellem

Yes. No, it's fair.

held that addition customers' million? at that balance on the another $XXX we your $XX is of to included that location? that have about So to million referenced $XX Is you or customers paid will question, million essentially is sheet inventory There's the for. in the in the in I prior think $XXX to and response happened be it was see inventory that million a have that just

Craig Gates

that or our inventory customer-paid are that inventory holding So we million is that netted. customers' $XX of –

million let's So not have $XXX did inventory, approaching $XX that that our we it, be or deposit against would if call inventories reserved, million.

Bill Dezellem

Right.

helpful. Okay. No, that's

other And question, long-term sorry Brett. asset you different... the distract to shift I'll from something to

Craig Gates

not to to Bill. able ahead. Go be going Go We're ahead. there, get

Bill Dezellem

looking share? the Vietnam, think had and can you coming make said that Relative I customers the is all be from I where for might come insights Where there? Vietnam viewpoint good have you open can the some that some now business I the things factory towards What from? but to Vietnam. think case, is prospective to you're ideas final decisions? What's

Craig Gates

to is are Vietnam talking now going. officially for slowly opened People tour. customers about

We haven't [indiscernible] they go yet.

who couple move in to start interestingly product want have as well customers a Vietnam to out product, We of of us customers to Vietnam. who new want super high-volume as Juarez

So I in product Vietnam. one same us sure building will Juarez have customers and our am of almost XX% the

Bill Dezellem

be at but all about expanding might early, to point you be It too the do thinking need what factory? Vietnam

Craig Gates

to on decision on based thinking to customer the of edge it's that we're it. like already teetering about us We're that. And basically all do the and There's do. what would space

Bill Dezellem

essentially, the a simple you it take rather space; the expansion just matter of happen? so the have And it's if would sounds like time make that it's to a process. It

Craig Gates

Yes.

Bill Dezellem

and Great. desperate paying you expedite charges how they that all in? incorporated to get enough is about customers talked now components. inventory or have then in past charges Are those are you not I know the absorbing for or And your expedite that are being

Craig Gates

years more would it's that build this teeth had gnashing and available. that a otherwise buy when half through ago And now all sure today asked month, history because a actually to good us being so and expedite some lot over to changes insight the an to of the also we delivery, and customer two gray the transparent. about and be time into this of only Well, trying a are functions Key Tronic a not the be months started, two parts two part we the many we've it of time their can it have to parts they fee part market. would made is were by when order from There trace for stuff and you of our so systems, been years kind it what's ago, recriminations times, that's appropriately ordered not faced – on

So parts that it's customer become we we the did if we quicker convinced what we POs, place order ordered much go were us job got bad on parts. does time, show forecast, get them where order a their through how the to getting what when in need waterfalls in through lead a times are that the for expedite we – the placed when to and POs fees when to we got to called

expedite fees. would Key have So last we Tronic the time if paid expedite pay in prove appropriately. is only can't the an for parts two we any for fee And the we not that ordered years,

is to so inflation say, issue shut be to it's plus it so going send what So factory, can our you can and X running. X% we plus fast other recover X get go to transitory. another a price that get and in was never charge when your of told the of X, going have the are that us ahead six and people down, continue next to the again, to up get customer months, weeks happens We're X%, the expenses new this. retrain XX% everybody and it's now home people going And we highlight then back, not in go bring find them terms of we two in terms for job, all them that expedite fees, is hired in two, we though Joe from expect was them and another the you even they're

that. do never can You

successful that prices whole But time two why negotiation the month already your that scenario this by and our more. customers in prices behind always your to get prices have up. you're And So that customers. part raising go to explaining up month, of we the have in been gone to is the done, we've appropriately

part chain. So in of driven the that's two this chain. inflation that all being of this in by disruptions It's we the supply about, disruptions also supply talked

Brett Larsen

your to what portion have So essentially Bill, capitalized question. answer. is more is, do a finance but got answer long-awaited it I lease. of was that is the an an I that exciting, wish I've

a that of we've to some it's So recently. financed help capital lease bought the that's production support equipment

Bill Dezellem

Thank good luck. you Good both, through Got it. Great. and this luck making quarter.

Craig Gates

Thanks Yes. Bill.

Brett Larsen

Thank you.

Operator

turn for And like Craig have conference any we to it questions at time. further I'd remarks. no Gates back additional or appears closing the to this

Craig Gates

everyone Brett you in Thank you participating look Okay. call. I to speaking again for conference again forward next to today's quarter. and

Operator

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

now disconnect. You may

Key Tronic (KTCC) 7 May 222022 Q3 Earnings call transcript