Key Tronic Corp (KTCC) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you so much for standing by. And welcome to the Key Tronic fourth quarter fiscal year 2007 conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today on Tuesday, the 21st of August, 2007. I would now like to turn the conference over to Mr. Jack Oehlke, President and Chief Executive Officer of Key Tronic. Please go ahead.

Good afternoon everyone. I am Jack Oehlke, President and Chief Executive Officer of Key Tronic. I would like to thank everyone for joining us today for our investor conference call. Ron Klawitter, our Chief Financial Officer, is here with me in our headquarters in Spokane Valley, Washington.

Today we released our results for the fourth quarter and the year-end of fiscal year 2007. During the year we saw a number of new programs begin ramping up, and we continued to win new programs in a wide range of industries. We also continued to invest in our business, strengthening our balance sheet and improving our asset utilization. Moreover, we are pleased with our solid operational efficiency and improvements in our inventory management. Moving into fiscal year 2008 we have become more competitive in pursuing more opportunities. And we continue to focus on maintaining our outstanding customer service and profitability.

Now I would like to turn the call over to Ron to review our financial performance. Then I will come back to discuss our progress and our strategy going forward.

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 the results for the quarter and year ended June 30, 2007. For the fourth quarter of fiscal 2007 we reported total revenue of $49.2 million. This compares to $47.2 million in our previous quarter and $52.5 million in the fourth quarter of fiscal 2006. For the entire fiscal year 2007 our total revenue was $201.7 million. This is up 7% from the $187.7 million for fiscal 2006.

For the fourth quarter of fiscal 2007 our gross margin was 9% compared to 8% in the previous quarter and 10% in the fourth quarter of fiscal 2006. In coming quarters we expect our overall gross margins to be in the range of 8 to 9%.

We're making the necessary investments to grow our business, while continuing to focus on controlling our operational overhead. Our RD&E costs for the fourth quarter were $695,000. This is down from $732,000 in the fourth quarter of last year. Our selling expenses for the quarter were $437,000. These are down from $524,000 a year ago. And our general and administrative expenses were $1.6 million. This is down from $1.7 million in the fourth quarter of last year. In coming quarters we anticipate holding our total operating expenses to around $3 million per quarter.

Our strong gross margins and effective cost controls had a positive impact on the bottom line. Net income for the fourth quarter of fiscal 2007 was $2.7 million, or $0.26 per diluted share, which included a gain from the sale of our former facility in Las Cruces, New Mexico of approximately $1.5 million, or $0.14 per diluted share. This compares to $7.1 million, or $0.71 per diluted share, for the fourth quarter of fiscal 2006, which you may recall, included an income tax benefit of approximately $5 million, or $0.50 per diluted share. For fiscal 2007 net income for the entire year was $5.2 million, or $0.51 per diluted share. This compares to the $9.8 million, or $1 per diluted share, for fiscal 2006.

Note that the sale price for our Las Cruces facility was approximately $4.3 million. We received approximately $2.8 million in cash and a $1.5 million note from the buyer. In our income statement we recognized a gain of $1.5 million. And there is a deferred gain of approximately $900,000 which will be recognized when the note is paid. And the note will be paid when a flood zone designation on the excess land attached to the property is removed.

Turning to the balance sheet. Our trade receivables were $30.3 million at the end of the fourth quarter of fiscal 2007. Our average days sales outstanding were at about 50 days, which is comparable to our recent quarters.

We are pleased to see our inventory levels come down after the inventory buildup associated with new customers and changing customer demand earlier in the year. Inventory at the end of the year was $32.3 million. This is down $7 million from our high point at the end of the second quarter when it was $39.3 million. We believe that we have made real progress in improving our inventory management, and expect our inventory levels to remain flat in coming quarters.

Our capital spending was $53,000 for the fourth quarter and $3.1 million for the full year. In fiscal year 2008 we expect our capital spending to be approximately $3 million.

In summary, we saw growth in revenue from new programs during the second half of fiscal 2007, and improved our asset utilization and inventory position. At the same time we have continued to make the necessary investments to support our long-term competitiveness to controlling our costs to maintain a strong balance sheet.

In the first quarter of fiscal 2008 we are seeing a little slower demand from a number of customers, both traditional and newer customers. As a result, we anticipate revenue to be in the range of $42 million to $45 million, with earnings in the range of $0.02 to $0.05 per share. As the year progresses, however, we expect our new programs to drive our growth. And over the longer term we believe that we're well-positioned to profitably expand our business. That is it for me, Jack.

During fiscal year 2007 we began to see our new programs contributing a growing portion of our revenue, and we continued to win new business in a wide range of industries. While experiencing slower demand from some of our traditional customers, we saw new customer programs begin to ramp up in the second half of the year.

In the fourth quarter we won significant new customer programs involving data storage devices, networking equipment, specialty printers, industrial controllers, and personal exercise equipment. One of the new programs was announced, an agreement we had with Imation Corp, a worldwide leader in removable data storage. When fully implemented, Imation is expected to contribute approximately $20 million to our annual revenue. In the coming weeks we expect to begin to provide the product assembly for Imation's tape-based data storage cartridges in our newly acquired manufacturing facility in Juarez.

We are extremely pleased to be working with a world-class customer like Imation. And this important new relationship represents the kind of quality programs we're pursuing and winning, which really leverages our full array of manufacturing capability. We expect Imation and the other newly won programs will begin contributing revenue in the second half of fiscal 2008. And believe they will have a substantial impact on our business over the long term.

It is worth noting that in a recent study by Bear Stearns reported that many U.S. companies have begun to recognize the advantages of outsourced manufacturing to EMS providers with production capabilities in Mexico and the U.S. East Asia may not be the optimal source for some high mix, lower volume product in terms of the total lowest landed cost.

In preparation for future growth we have continued to invest in our business and improve our asset utilization. During the past year we have purchased a new building to consolidate and expand our operations in Mexico, entered a new SMP production facility in our Spokane Valley facility, and completed the sale of our under utilized facility in New Mexico.

Moving into fiscal year 2008 we continue to strengthen our reputation and demonstrate our ability to provide a wide range of EMS services involving electrical and mechanical engineering, precision plastic molding, worldwide logistics and more. As a result we have become more competitive in pursuing opportunities with both existing and new customers, while we continue to focus on controlling costs and maintaining our outstanding customer service and operational efficiency.

Going forward we expect to continue to broaden and diversify our customer base, and feel well-positioned for profitable growth in fiscal year 2008 and beyond. I want to take this opportunity at this point to thank our employees, our customers, our suppliers and our shareholders for their contributions to the success in our fiscal year 2007. And again, thank you for your ongoing continued support.

This now concludes the formal portion of our presentation. And Ron and I will be more than pleased to answer any questions you may have at this point.

(OPERATOR INSTRUCTIONS). Bill Dezellem, Tieton Capital Management.

We have a group of questions. First of all, relative to the new product wins that you have had, would you walk us through in some more detail what led to those customer wins, and if you can, categorizing them by size, whether it be small, medium or large? And then specifically, I think that the personal exercise equipment is a new product category that you have not addressed historically, and how that came to fruition.

I think, Bill, we touched upon that. Certainly the biggest win that we discussed was Imation and the tape storage device. I think, as we said, we are in the process of relocating that in our new facility in Juarez. And expect that over the year to ramp up and be a potential $20 million program for us.

We talked about some other wins. They are in the process of ramping up. We are going through what we call the new product introduction phrase, or actually taking the design and building some first prototypes, and then working with the customer to finalize that and bring it into production.

And I think that the last part of your question was the new personal exercise equipment. That was a new opportunity for us. I think it was made really profitable by having our facility here in Spokane, the ability to do the prototypes and work with them, and actually moving that product back from China -- as we go through the process and bringing it into our facility.

What Jack is talking about, the bringing the NPI through Spokane is a big help. But they are really interested in that specific case of our China facility and lower cost to us. That is going to actually be a box built for our China facility.

Would you please be able to take each of the wins that you have described and categorize them, small, medium and large, and basically let's use Imation as large, given that you have mentioned that is at $20 million.

I think as we have said the Imation is large, in the $20 million. The rest are in the medium category or about $5 million in size.

$5 million to $15 million is the range of them. Imation is a larger one. But we don't mind hitting a lot of little singles, because that spreads our risk over a larger number of customers. And that is one of our strategies as well, Bill, has been trying to broaden our customer base so we're not so heavily reliant upon just one or two major customers.

So although we're specifically not going out and looking for that size, that seems to go with our sweet spot. And we picked them up from a number of different sources. I think we have talked in the past about our different ways of getting leads. We use a lead generator. We've got internal sales. We've got a rep network that we use. We also have the Internet to pick up some leads for the Internet, as well as word-of-mouth. It is kind of all of our marketing efforts are clicking on all cylinders there.

Is it a correct understanding on our part that all of those product wins that you described happened in the June quarter?

That's correct.

That was not a fiscal '07 characterization, that was a June quarter characterization of wins?

That's right. The most recent ones that we talked about that Jack had mentioned in our comments.

That is a significantly greater number of wins than you have had in quite some time. Is that just coincidence that there is this number of wins taking place in a short period of time, or is this an indication of a change in approach that you all took some time ago that is now starting to bear fruit that may be winning two to four customers, new customers, per quarter might be more normal?

I think, if you recall, our wins are sort of -- they come in groups. They go up and down. And about a year ago we announced about the same number of wins.

I think it was last year's fourth quarter we had about four or five that we announced that just happened all in at that time. I wouldn't say that I think it is more coincidental than by design. Obviously, we would like to have them come in all the time, and just come in smoothly, but we take them whenever we can get them.

(OPERATOR INSTRUCTIONS). Bill Dezellem.

We have actually have a couple of more. First of all relative to the guidance for the slowdown in revenues in the first fiscal quarter, would you please characterize what you are seeing today that is similar or different to what you were seeing in the -- I believe it was the December quarter, so your fiscal Q2 here earlier this year that -- I guess last fiscal year now -- that you had a bit of slowness with an inventory correction? You at that point weren't seeing what you thought was a real slowdown in ultimate demand. If you would, compare and contrast what you're saying today from an overview perspective, and then whether it is the same customers or different customers that are slowing?

At this point it is different customers. I think what we are seeing, and I don't know it is the impact -- all the discussion on the economy or what. But it was kind of interesting that about two and half weeks ago we got calls from customers, two existing and two new customers, that actually looked at making adjustments to their revenue in our first quarter, which between the four of them totaled about $6 million.

When asked the question, why are they adjusting their requirements on such short notice, their response was that there is a slowing demand for their orders, as well as I think there is more emphasis on inventory to reduce that and not carry a lot of inventory going into -- if you are not selling it.

But that is part of the advantage that we are able to work with our customers and provide them is that in today's world the ability to respond both up-and-down rather quickly is what gains you the long-term relationships you have with the customers, as well as the ability to handle upsides when they do come, or downsides when they do not have a demand for their orders.

It is that flexibility, I think, that is one of the values Key Tronic brings to our existing customer base. But like I said, it just happened within the last two and half weeks we have a slowdown in four of our customers.

It is important to point out that we haven't lost any customers. It is just the existing customers, they have reduced their demand on us. As far as where it is coming back, it is anybody's guess. We don't have visibility to their end markets. So how fast it will come back is hard for us to predict. That is why we only look at a quarter at a time.

But we did say in our press release that we expect growth for the full year. And so if our first quarter comes in at $45 million, we are starting out in a hole, because last year's first quarter was $55 million. So we've got some making up to do for the rest of the year, as well as to achieve our goal of growing the Company.

That actually was going to be part of my follow-up question, is you had referenced in the opening comments profitable growth going forward, which we presume means fiscal '08, which would put -- your revenues would need to grow above that $200 million mark. And earnings per share, assuming we get rid of some of these extra items, would need to be north of $0.51 per share, unless I have missed some of the extraordinaries. And essentially I want to make sure that is what you were referencing relative to profitable growth.

You are absolutely right.

Right.

If you would allow me to circle back, basically just to try to help us understand maybe what might be going on in the economy, what type of customers were the two existing, and what type were the two new in terms of industries that they serve or products that you are producing?

I think at this point, as we said in the past, with the confidentiality agreements we have signed we can't really discuss individual customers.

We are afraid that if we even tell you what industries they are that you may guess (multiple speakers).

You can draw a conclusion.

Yes, so --.

That would certainly not be good, now would it?

No.

Let me switch to an entirely different question then. I think that we heard in your opening comments that you are being, or intend to be, or can be more competitive in new opportunities in fiscal '08. Would you please describe what you mean by those comments?

I think what we have done is we are doing a much better job of going out and understanding the customers' requirements, and then working with them to make sure that their product is competitive for them and us both, both from a material standpoint, an engineering standpoint, and that kind of thing.

That relates a little bit to what I had mentioned earlier. We are in the process of doing some ramps in the Q4, and some of those are sliding into Q1 as we go forward. Part of it is working with that customer to really enhance the produceability of that product so it minimizes our cost in building it for them, but also hopefully lowers their overall total cost of the product they're taking to the marketplace.

And also some of these new programs that we're quoting on uses more than just one of our manufacturing competencies. It is not just printed circuit boards and assemblies, but it includes molding and it includes box build. The more value-add it requires, the more competitive we can become, because we can offer them a lot more than just printed circuit boards assembly.

That is helpful. And then given that you have discussed Imation as a customer, or announced them, they have had some challenges of their own, at least it appears that way just from reading their public press releases. Do their issues accelerate what they -- the ramp that they would have with you or does it decelerate because they're dealing with those issues?

I would rather not discuss our customers. I think you would have to ask them those kind of questions.

(OPERATOR INSTRUCTIONS). Bill Dezellem.

Sorry, I didn't ask this before. Would you please walk us through your pipeline that you see for additional new business that -- not the wins you had this quarter, but on a go forward basis how that pipeline looks, and how maybe you would characterize it relative to its quantity and quality versus the past.

No, that is a good question. If you look at the pipeline, we're pretty encouraged by it. And I think I've made this statement before, and I will continue to qualify it. Any day, any week, any month, you take a look at this snapshot it is going to change based upon what we have in the quote funnel. But at this point, I just took a look at it the other day, and we basically have 10 quote opportunities that we're working on. And if you look at quantifying what size they are, I think it is a reference point Ronny used before. Our sweet spot is the $5 million to $15 million. So that is the annualized amount that we're quoting on. And we feel pretty good about that quantity of opportunities, like I said, in the funnel.

Once business gets to, with your funnel as you describe it, to the quote opportunities, what has historically been your hit rate?

Hard to quantify that. That is a real variable. I would just be strictly guessing. As we look at it at any one time -- and some of these are interesting from the standpoint that we will go and quote it, and sometimes they do not materialize for six months to a year. So it is hard to say. I don't think we have ever done any stats as to what our hit rate is over a period of time. But that being probably the only realistic way you can look at it.

I guess the other way to look at that is we picked up, as I mentioned last year in our fourth quarter -- that's fiscal year 2006 -- we had four to five new customers. We've got about the same number this current year that we just announced that we have just won. That gives you an idea of the number of new customers won in the last two years. You can draw your own percentages. We may be higher or lower.

The further it goes down the funnel, the higher our win percentage is. And so that includes -- again they visit our facility here in Spokane Valley and also see our facility either in China and/or Juarez. All of them have visits scheduled to our facility. So our win percentage goes up the more they're able to see our capabilities. And they have gone -- they are all going to the next level of at least looking at our facility, so we feel pretty encouraged by that.

If we just take a midpoint of between 0 and 10, since there are ten quote opportunities, and say five, which matches up nicely with the last couple of years' wins. That would equate to on the $5 million to $15 million of revenue per customer or an average would equate to $25 million to $75 million of potential revenue for five customers.

If we are doing the math correctly, that should lead to at least $0.25 to $0.75 of additional earnings, because it seems as though about every $1 million of revenue tends to equate to roughly $0.01 a share. Are we thinking about that correctly?

I think incrementally we add about -- per million about -- we're about 10% incremental, 10 to 15%, so both up-and-down. So if you had $1 million of revenue you would expect to have about $100,000 to $150,000 of profit. So at 10 million shares that is about $0.01, so I guess your numbers are -- make sense.

That is helpful. Then relative to the pull in of forecast that you experienced a couple of weeks ago, given -- it sounds like from what you are hearing from your customers is that might be a bit of a knee-jerk reaction to media reports of slowdown due to subprime home foreclosures and some of those issues in some locations around the country.

At this point we've really don't know.

Okay. I guess where I am really asking the question is does it seem to you that that was such a fast phenomenon that they could easily turn the spigot back on just as quickly, and come back to you, whether it is now or whether it is in a month, and ask you to ramp back up because they ended up being too conservative?

That is certainly possible. I think, like I said before, that is one of the advantages we bring to the marketplace is our ability to ramp up and ramp down with our customer demand.

But even if they don't come back to you to ramp up, with the new customers that you have won and the transition to ramp that business at Key Tronic factories, you are still anticipating that you should be able to have the profitable growth in fiscal '08, so more than $0.50 of earnings next year, or I guess this year now in fiscal '08?

Yes, I think, as we said, that is our expectation.

That's very helpful. Thank you again.

This concludes our question and answer session. Management, please continue with any closing comments.

Again, Ron and I would like to thank you for participating in today's conference call. And we look forward to speaking to you again at the end of our quarter one of fiscal year 2008. Thank you and have a good day.

Thank you, ladies and gentlemen, this does conclude the Key Tronic fourth quarter fiscal year 2007 conference call. If you would like to listen to a replay of today's conference, you can do so by dialing 1-800-405-2236 or 303-590-3000 and enter the access code 11094043. (OPERATOR INSTRUCTIONS).

ACT would like to thank you for your participation today. You may now disconnect. Have a very pleasant rest of your day.