Key Tronic Corp (KTCC) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Key Tronic Q3 2008 conference call. (OPERATOR INSTRUCTIONS.) This conference is being recorded today, Tuesday, April 29th, 2008.

I would now like to turn the conference over to Mr. Jack Oehlke. Please go ahead.

Okay. Thank you. Good afternoon, everyone. I'm Jack Oehlke, President and Chief Executive Officer of Key Tronic. I'd like to thank everyone for joining us today for our investor conference call. Ron Klawitter, our Chief Financial Officer, is here with me at our headquarters in Spokane Valley.

Today we released our results for the third quarter of fiscal 2008. We are very pleased with our strong year-over-year third quarter growth in revenue and earnings, driven by increased demand from both new and our established customers.

We are also pleased to see the expected improvement in our revenue, gross margin, and profitability from the previous quarter. Moreover, we have continued to diversify our customer portfolio, winning new business across a wide range of industries which represents the cornerstone of our long-term strategic plan.

While there is widespread uncertainty regarding the global economic environment, we continue to pursue and win new customer opportunities for profitable growth.

Now, I'd like to turn the call over to Ron to review our financial performance, then I will come back to discuss our progress and strategy going forward. Ron, please?

Okay. Thanks, Jack. 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 ended March 29th, 2008. For the third quarter of fiscal 2008 we reported total revenue of $51.5 million. This is up 9% from $47.2 million in the same quarter of fiscal 2007.

New customers, which were not contributing revenue a year ago, contributed over $6.3 million in revenue in the third quarter, and we expect these new customers will contribute a growing portion of revenue in coming quarters.

For the third quarter of fiscal 2008, our gross margin was over 8%. This is up from about 7% in the previous quarter. You will recall that, because of our efforts to fulfill accelerated customer demand in December, our gross margins were adversely impacted in Q2. We're pleased to see the anticipated improvement. In coming quarters, we expect overall gross profits to remain around 8%.

In preparation for future growth, we continue making the necessary investments to grow our business, while continuing to focus on controlling our operating overhead. Research, development and engineering costs for the third quarter were $678,000. This is down from $709,000 in the third quarter of fiscal 2007.

Our selling expenses for the quarter were $407,000, which is up modestly from a year ago when we had $356,000. And general and administrative expenses for the third quarter were $1.7 million; again, up slightly from the $1.6 million in the third quarter of fiscal 2007. In coming quarters, we anticipate holding total operating expenses to around $3 million per quarter.

Our revenue growth had a positive impact on our bottom line. Net income for the third quarter of fiscal 2008 was $1.2 million or $0.11 per diluted share. This is up 57% from the $0.7 million, or $0.07 per diluted share, for the same quarter of fiscal 2007. For the first 9 months of fiscal 2008, net income was $3 million or $0.29 per diluted share. This is up 19% from $2.5 million, or $0.24 per diluted share, for the same period in fiscal 2007.

Turning to the balance sheet, our trade receivables were $32.9 million at the end of the third quarter of fiscal 2008. Our average days sales outstanding were 55 days, which is comparable to recent quarters.

Inventory was $38.7 million at the end of the third quarter, and this is up from $33.8 million at the end of the previous quarter. The increase in inventory is driven by new customers, and also by expedited demand from our customers. We expect inventory to decline in the fourth quarter as we fulfill that expedited customer demand.

Our capital spending was $193,000 for the third quarter, and we expect it to be approximately $1.5 million for the full year.

In summary, our year-over-year third quarter growth continues to reflect increased demand from a number of our established and new customers. At the same time, we have continued to make the necessary investments to support our long-term competitiveness, control our costs, and maintain our strong balance sheet.

While the overall economic environment has created some uncertainty in the EMS industry, we expect new customer programs to drive revenue and earnings growth in coming periods. In the fourth quarter we expect revenue in the range of $50 million to $54 million, with earnings in the range of $0.10 to $0.15 per share. Over the longer term, we believe that we are well positioned to profitably expand our business.

That's it for me, Jack.

Okay. Thank you, Ron.

We are pleased with our performance in the third quarter and believe that we continue to make good progress in diversifying our business across a wide range of customers in different industries. While the changing and challenging global environment has impacted many of our competitors, our revenue is increasing as we continue to ramp up new customer programs. We expect another strong quarter as we close out this fiscal year.

By the end of the fiscal year we will have over 10 significant new customer programs in production. These programs include data storage devices, networking equipment, specialty printers, industrial controllers, personal exercise equipment, industrial tools, specialty display panels, scientific instruments, and security surveillance equipment.

In keeping with our long-term strategic objectives, we are successfully building a significantly more diversified customer portfolio and a less concentrated revenue base spanning a wide range of industries. We continue to expect new customer programs to contribute almost $30 million in this fiscal year, and believe that those programs will have a positive impact on our business over the long term.

During the third quarter we continued to diversify our customer portfolio, winning new programs involving a customer medical device, energy technology, home filtration, and a specialized touch-screen panel. We expect these new programs to be contributing to revenue in fiscal year 2009, and we continue to pursue new opportunities as well.

In preparation for future growth, we have continued to invest in our business and improve our asset utilization. We are in the process of expanding our ASMT capacity and capability in Juarez. This will allow us to better handle our existing demand and provide flexibility for the future.

In summary, we continue to execute our long-term strategic plan. We believe Key Tronic is successfully expanding its market presence and becoming more competitive in pursuit of new business, as well as maintaining strong relationships with our established customers. At the same time, 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. At the same time, we need to continue to keep a careful eye on global economic conditions in coming periods, assessing the impact it may have on our existing customer base and also our new customers coming onboard.

We continue to be pleased with our progress and excited about the potential for our profitable growth.

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

Operator?

Thank you. (OPERATOR INSTRUCTIONS.) Our first question comes from the line of Sam Bergman with Bayberry Capital Management. Please go ahead.

Good afternoon, Jack and Ron. Nice quarter.

Thank you.

Can you talk a little bit about the design wins this quarter or -- and at the same time about some of the programs that are winding down and the ones that are going to take its place going forward in the next 12 months.

Okay. I think your -- a two-part question. The ones that are winding down, I think it's been publicly announced that Zebra's in the process of transferring some of their new product build to Jabil and we're in the process of working with them to transfer those products. Again, we don't have a real firm timeline and know when that's going to happen, and it's not going to be the entire product line, it's just going to be the higher volume products that are going to them.

But I think, like we said, that was -- is being replaced by new customer programs coming onboard. And we said there's 10 to 12 new programs that ramped up in our fiscal year 2008 and we expect 6 more new programs to start coming onboard. They're in the introduction phase and that should help us, again, grow in fiscal 2009 and more than replace that revenue and, hopefully, grow beyond that.

Do you have any idea of what that growth could be in 2009? (Inaudible) programs--.

--Unfortunately, no. If someone could help us predict what the economy's going to do and what direction it's going to go. We do not really have -- to be able to guess what our customer base is going to do is kind of impossible for us.

What about wins that you got this quarter? When do you expect production for those particular wins to ramp up? The second quarter? Third quarter?

It's going to sort of be a hedged answer, but we've done some looking at it in the past and new programs with customers, by the time we finish the quote, they have a chance to tour our facility either in Juarez or Shanghai, do the MPI build, which we call the new production release, that can take anywhere from 6 months to as long as 24 months, depending upon what they have to do to get that product released in their factory. And a lot of times it's working with them to ensure and improve the producibility of their product so it not only meets but exceeds their expectations.

How would you compare the quality of new work that you're bidding on versus what you bid on last year at this time?

I don't -- the quality of the new work is probably not significantly different than what we've done last year. We have some customers that have a lot of detailed information that we're able to go forward. Other customers I think -- and that's what we sort of bring to the table, we're able to work with them and better refine their design. So, it improves the producibility and the quality of the product they're bringing to the marketplace.

Can you describe the energy technology product that is going to be ramping up?

Not really. At this point, I think we have said before we're under NDA with all these programs and have signed confidentiality agreements that really don't allow us to talk about our customers and their products.

Alright. The last question with regard to the price of the stock and the book value. What can Key Tronic do in the short term besides -- because the long term apparently you have some design wins and the revenue is going to take care of those design wins going forward. And what can you do to have this -- have more interest in the stock and have it stop hovering around the $2.50 range, which is ridiculous for a book value of over 4 bucks. I realize you have a credit line that probably prohibits you from buying back stock. Is there any possible way of getting some other financing which would enable you to buy stock?

Well, Sam, I guess first thing I'd say is tell all your friends what a great deal this is and maybe they'll buy some more. But beyond that, I think what we concentrate on is we feel that if we continue to deliver performance, revenue growth and customer expansion, which is what we're finally starting to see, because we were -- in the past we've been tied -- I wouldn't say tied, but we were -- our top three customers had close to 60% of our revenue. And we were vulnerable having that much revenue in just a few customers.

So, over the last year and a half we've really made a concerted effort to expand the customer base. And as Jack mentioned, we've got over a dozen or so this year, and another six in the pipeline that should be coming onboard next year. So, we've done a pretty good job of expanding that customer base so that if any of the big customers -- and as he mentioned Zebra, going down -- the new customers should more than offset the revenue decline we see from some of the existing customers.

We continue to work on return on invested capital. And everything that we look at and every quote that we do we make sure that -- we have a pretty high target. Our target's around 14% return on invested capital for anything we invest in. So, any inventory, receivables, any equipment that we invest in, our goal is to get a return on invested capital of around 14%. And we've been pretty successful at hitting that number or above that number.

So, with growing revenues, growing profits, and return on invested capital up around 14%, which is at the high end of the industry averages, the -- we feel that eventually we'll be recognized. We're a small cap company. Nobody follows us. And they tell us that we're too small for them to put any analyst coverage on us. So, it's really difficult to get that kind of mindshare.

But we feel that if we keep doing the right things and keep growing the revenue, working on improving operations, delivering great financial performance, that eventually we'll be recognized. And I think before I came in here I noticed that, after trading hours, the stock did bump up about $0.70 a share or so. So, it's starting to be recognized.

Well, thank you very much. Good luck in the upcoming quarters.

Okay. Thank you.

Thank you. Our next question comes from the line of Bill Dezellem with Tieton Capital Management. Please go ahead.

Thank you. We had a couple of questions. First of all, the four new customers that you won this quarter, do we understand correctly those are actually new customers and not new programs with existing customers?

Yes, they are new customers, Bill.

And have you in this quarter, in addition to those four new customers, won any new programs from existing customers that we should be adding on?

Well, I wouldn't say add on. The new customers -- I mean the new programs you add on from existing customers more than likely replaces old programs. So, I wouldn't say it would really be an add-on. I don't want to keep getting too many add-ons here but -- and get expectations too high.

But the -- other than Zebra, and perhaps one other customer, we don't have really any of our existing customers, we don't expect or haven't gotten any signals from them that revenue's going to decline. And next year these new customer programs that we've won -- new customers that we've won, should deliver even more revenue than what we enjoyed so far this year in fiscal year 2008.

And if we look at those four new pieces of business that you -- or customers that you won this quarter, in aggregate, what sort of dollar amount do they represent?

I'd say all of our customers -- any -- our goal is to try to get customers that would be able to deliver about $5 million a year in revenue. Now, some of them may start out smaller than that. Some of them may deliver $10 million to $15 million a year revenue. But that's kind of what we're looking at is $5 million to $10 million customers is kind of our target.

We'll do -- obviously, we'll do more -- do customers that do more revenue than that. The customers that do less revenue than that, unless they've got the potential to grow, it's a lot of work to put into a new customer. And if you're only going to get $1 million a year revenue off of them, then you've probably got better use for your resources.

And so, given what you just said, we should think that these four new customers should represent, on an annualized basis, at least $20 million of new revenues. And like you said, that will help offset Zebra and the other customer that may be a bit lower next year.

Yes.

Yes. That's correct. And that's when they get to full ramp.

Right. And when do you -- and I know you said in the release and on the call here that you're expecting fiscal '09 for these customers to begin to ramp. But where over the course of fiscal '09 are you anticipating that process to begin? Q1 or -- as we of course on the outside would all hope, or is it later in the year?

Yes. Bill, it -- some will be there in Q1, but I think like I said before, the ramp -- by the time we bring the product in, we work with the customer to get the product released, we work through some of the design modification opportunities, it really, truly does vary anywhere from 6 months -- I said 24. Hopefully that just complex one, less than that. So, it's -- every customer's a variable is what it comes down to.

And one additional question before I get off. You have been working for many years to win additional business. And it seems as though this year that you've all of a sudden truly gained real traction on the new customer win front whereas, before, the traction just did not seem to be there. Now, you win business on occasions but not to the degree that you are now so consistently winning business. Would you be able to share with us what you did or what you changed, or why you are appearing to be so successful on the new business front now?

Well, I think a lot of things came to fruition in the last year to 18 months. We made some changes in our materials groups where we got more aggressive and are able to get materials at a lower cost than we were able to do before.

I think in the previous conference calls we discussed that we expanded our Spokane operation. We actually have an SMT line in Spokane that allows us to work with customers and goes through the start-up phase of their program. And we continue to expand both production as well as support capabilities in our China facility.

And I think the other thing, too, that helps is, once we have a larger customer base and customers are able to come in and see other products being built, it makes it easier for them to visualize their products coming into our facility.

Thank you both.

Okay. Thank you, Bill.

Thank you. (OPERATOR INSTRUCTIONS.) Our next question is a follow up question from the line of Bill Dezellem with Tieton Capital Management. Please go ahead.

Yes. I'm sorry that I didn't just continue on. Relative to the changes that are taking place in China -- and I'm thinking about inflation, currency, etc. -- to what degree have you seen existing, but maybe even more importantly, prospective customers showing a higher degree of interest in your Mexican operations than they previously had?

Yes. I think that's happening, Bill. And it's hard to predict exactly what's going to happen from an overall cost standpoint in China. But I think the thing we see because of that is, if you have a high volume product that doesn't have a lot of variation that can go on the water and get shipped over here, that makes a lot of sense. But if you have a low volume product that has a lot of variety in it, or you're unable to really forecast what the future's going to hold, it makes it -- it makes a lot more sense to be manufactured in Mexico.

Because what we've seen, and we've proven it to the customers and ourselves, is that if you miss your forecast and you have to build something in a short-term basis and fly it over here, there is really no advantage of having that product in China versus Mexico, because it's really eaten up in the transportation cost.

And then did we hear you correctly in the prepared remarks note that, yes, you're aware that there are negative economic headlines out there, but relative to your business that you're just not seeing that? Or did I misinterpret your comments?

No, that's correct. We don't know what's really going to happen in the economy out -- in the future. But right now, working with our existing customer base and new customers we have won, we really haven't seen that happening. Some of our customers, their volumes are down but, by the same token, some of our established customers are up. And like we said, the new customers are coming onboard so that's basically just added revenue for us.

You're not seeing anything out of the ordinary of existing customers; some up, some down, which is typical.

That's pretty typical. You're exactly right.

And then, Ron, I believe that in your opening remarks you referenced the inventories being up, and partially due to some new customer issues and expedited inventory. And given that the magnitude of the inventory increase was $5 million, would you expound upon your comments, please?

Okay. Well, you like to round up, Bill, because inventory was -- well, I guess it is almost $5 million up. But it's -- the -- I mentioned that we have -- of course, new customer programs, even if your revenue's only going up a little bit, when you add as many new customers as we added, you still have to have a base of inventory to support them. And some of our existing customers, we haven't seen any decline in their demand yet, so that revenue -- that inventory hasn't started to decline.

So, you're building revenues in anticipation of revenue -- you're building inventory as anticipation of revenue when it's coming, not based upon what you've -- what the revenue you just had in the previous quarter. So, that's what -- that's the new customer portion of that inventory growth.

The other we talked about was expedited demand. Towards the end of our customer -- our quarter we had customers that were expediting orders, asking us to pull orders in within lead time. So, as we try to fulfill their desires, we go out and buy material. But unless you get 100% of all the material for those customers you can't build the product. So we may, for some of these orders, have gotten in 90% of the inventory to support these expedited orders, but yet you can't build the product. So our inventories goes up.

We think this is a temporary blip up. That's why we expect our inventory to decline in the fourth quarter, because of that -- as we fulfill that expedited demand, our inventory should hopefully go back down like we expect. And that's probably about a $2 million -- almost half of that inventory growth is coming from expedited demand.

And how is the expedited demand that you experienced at the end of the March quarter similar or different to the expedited demand that you experienced at the end of the December quarter?

Well, we're able to get the revenue out in the December quarter and that's why we had lower gross margins, because we spent the money to hire -- or to have our people work over Christmas down in Juarez to get that revenue in the second quarter. In the third quarter we did not fulfill all that demand. So, some of that demand is going into the fourth quarter.

And so--.

--Fourth quarter revenue--.

--In theory, the month of April, from a revenue standpoint, started reasonably strong. Would that be--?

--Yes, we're not talking about fourth quarter, by month by month. We're not going to talk about it.

And maybe then I should ask that, given in the December quarter the expedited shipments actually negatively impacted your margins, it sounds like you don't anticipate that to be the case this quarter given that you, I believe said in your prior remarks, that you anticipate gross margins similar in Q4 as they were to Q3.

Right. We're not working overtime to deliver that expedited demand. It's just that we weren't able to get all the materials in. We should be able to schedule it in our normal work orders -- work hours.

Great. Thank you both again.

And an additional point I think we brought in there, Bill, too, is that we said we're expanding our capability and capacity in SMT in Juarez. And that will help us to produce product on a regular basis versus an overtime basis.

Great. Okay. Thanks again and congratulations on a nice quarter and hopefully the beginning of some real nice consistency.

Well, thank you, Bill.

Thank you. That does conclude our question and answer session. I'd like to turn it back over to management for closing remarks.

Okay. Again, Ron and I would really thank each one of you for participating in today's conference call, and we look forward to speaking to you again at the end of our fourth quarter. So, thank you and have a great day.

Ladies and gentlemen, that does conclude our conference. Thank you for your participation. You may now disconnect.