Key Tronic Corp (KTCC) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Key Tronic's fourth quarter fiscal year 2008 conference call.

During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions).

As a reminder this conference is being recorded today, Tuesday, August 19th of 2008.

At this time I would like to turn the conference over to Mr. Jack Oehlke. Please go ahead, Sir.

Okay. Thank you.

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 at our headquarters in Spokane Valley.

Today, we released our results for the fourth quarter and fiscal year end 2008. We are pleased with our execution and performance for the quarter and the year. Our year-over-year revenue growth was driven by increased demand from [due] customer programs which continue to ramp up.

For the fourth quarter and for the year we achieved the highest revenue since we implemented our ems strategy. In the fourth quarter, we saw very strong year-over-year revenue growth and the strongest gross margins we have seen in many years.

Moreover, we continue to diversify our customer portfolio, winning new business across the wide range of industries which represents, really, 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 opportunity for profitable growth.

Now I would like to turn the call over to Ron to review our financial performance. And then when he is completed I will come back and discuss our progress and our strategy going forward.

All right. 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 of 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 Web site.

As Jack mentioned, today we released the results for our quarter and year end to June 28, 2008. For the fourth quarter of fiscal 2008, our revenue was $57.3 million. This is up 17% from the $49.2 million in the same quarter of fiscal 2007.

For fiscal 2008 for the entire year, our total revenue was $204.1 million. This is up from $201.7 million for fiscal 2007.

We had eight new customers, which were not contributing revenue in fiscal 2007 but contributed about 13% of our total revenue in fiscal 2008. We expect these new customers will contribute a growing portion of our revenue in coming quarters.

For the fourth quarter of fiscal 2008, our gross margin was nearly 11%. This is up from 8% in the previous quarter and up from 9% in the same period of last year.

We are pleased to see this strong improvement in gross margins. This gives an indication of the kind of incremental profit we can achieve as we grow our business. In coming quarters, we expect overall gross margins to be around 8%. I will go into a little more detail of that later.

In preparation for future growth, we continue making the necessary investments to grow our business while containing to focus on controlling our operating overhead. Our D&E costs for the fourth quarter were $679,000. This is down slightly from $695,000 in the fourth quarter of fiscal 2007.

Our selling expenses for the quarter were $549,000, which is up from $437,000 a year ago. In our General and Administrative expenses we're $1.8 million, again up slightly from the $1.6 million in the fourth quarter of fiscal 2007. In coming quarters, we anticipate holding our total operating expenses to around $3 million per quarter.

Our revenue growth had a positive impact on our bottom line. Net income for the fourth quarter of fiscal 2008 was $2.6 million, or $0.25 per diluted share, compared to $2.7 million or $0.26 per diluted share for the same period of fiscal 2007.

Keep in mind that our results for the fourth quarter of fiscal 2007 included a benefit of approximately $1.5 million or $0.14 per diluted share from the sale of a facility. So almost half or a little bit over half of our income last year's fourth quarter came from the sale of this building.

For fiscal 2008, net income was $5.6 million or $0.54 per diluted share. This is up 7% from the $5.2 million, or $0.51 per share for the same period of fiscal 2007.

Turning to the balance sheet, our trade receivables were $36 million at the end of the fourth quarter of fiscal 2008. This is up from $30.4 million a year ago and reflects our revenue growth.

Our day sales outstanding were approximately 52 days at the end of the quarter, which is comparable to recent quarters that we reported.

Inventory came in at $37.9 million at the end of the fourth quarter. This is down from the $38.7 million at the end of the previous quarter. We were pleased to see our inventory decline in the fourth quarter as we successfully fulfilled the growing demand from our new customers.

Our capital spending was $260,000 for the fourth quarter and approximately $1.2 million for the full year. It is significant to note that we continue to maintain one of the highest returns on invested capital in the industry, with our return on invested capital close to 13% for fiscal 2008.

In summary, our year-over-year revenue growth reflects increased demand from our new customers. At the same time we have continued to make the necessary investments to support our long-term competitiveness, control our cost and maintain our strong balance sheet.

Moving into fiscal 2009, the overall economic environment continues to create uncertainty. As we discussed in earlier calls, we do expect a decline in business with several existing customers.

However, with many of the new customers ramping up, we expect the growing contribution of new customer programs to offset the impact of the slowdown among our older customers by the end of this fiscal year.

Taking all these factors into consideration, we expect our revenue to be in the range of $45 million to $48 million in the first quarter of fiscal 2009, with earnings in the range of $0.02 to $0.05 per share. Over the longer-term, we believe we are well-positioned to properly expand our business.

We [did] mention that we expect our gross margins to be around 8% in the first quarter. And it is reflecting of the fact that our revenues are going to be a little bit lower than what we had in the fourth quarter.

That's it for me, Jack.

Thank you, Ron. We are pleased with our performance in fiscal year 2008. And we have continued to make good progress in diversifying our business across the wide range of customers in different industries. After a number of challenging years, we are really seeing our ems strategy payoff.

Over the last two years we have won 18 new customers. These programs include data storage devices, networking equipment, specialty printers, industrial equipment, personal exercise equipment, specialty display panels, scientific instruments, security and surveillance equipment, consumer medical devices, energy technology, specialized touchscreen panels, telecommunications, and consumer products.

Eight of these new customers generating revenue in fiscal year 2008 accounted for 13% of our total revenue for the year, after these first eight programs are still in the [ramp-up] stage going into fiscal year 2009. During fiscal year 2009, we expect 10 additional new customers to come online. By the end of fiscal 2009, we expect all 18 new customers to be generating revenue and account for approximately 40% of our total revenue for the year.

In keeping with our long-term strategic objective, we are successfully building a significantly more diversified customer portfolio and a less concentrated revenue base, spanning a wider range of industries as I just covered.

Our sales pipeline of potential new customers also continues to be strong. While it continues to take a long time between winning a new program and seeing that new program actually go into production, we believe that our new programs are beginning to have a very positive impact on our business over the long term.

In preparation for future growth, we continued during fiscal 2008 to invest in our business, strengthening our balance sheet and improving our asset utilization. We added a new SMT production facility in Spokane Valley, completed the sale of our Las Cruces facility and purchased a new building to consolidate and expand our operations in Mexico.

While many of our larger competitors have focused exclusively on China sourcing, our dual focus on having efficient production capabilities in both China and Mexico has positioned us to benefit, as many OEMs reevaluate the mix of their offshore production. With the significant increases in oil, shipping and labor costs associated with China production, many domestic OEMs are beginning to more fully calculate the true cost and deliver product [at] discovering the advantages of sourcing in Mexico.

This is particularly true in the case of smaller midsize programs with production runs in the range of 5 million to 10 million annually.

Most of our EMS competitors comparable in our size -- what the industry adheres to as Tier 3 providers -- do not have offshore capability. Thus, our focus on building a world-class Mexico and China facilities has contribute to our winning new business more efficiently, handling our customer demand, and providing flexibility and scalability for the future.

We recently restructured our management team to better address the needs of the growing business. During the fourth quarter we announced the promotion of [Doug Burkhart] Doug to Vice President of Worldwide Operations and [Larry Bostwick] to Vice President of Engineering and Quality.

In their new important roles, we believe Doug and Larry's extensive experience and energy and talents will help Key Tronic to continue to grow in the leading ems manufacturer.

In summary we continue to execute our long-term strategic plan. During fiscal 2008, we achieved our best year since the adoption of our ems strategy. We are beginning to bring in more new customers than ever before and seeing those new customers contribute to a growing portion of revenue.

We also believe Key Tronic is successfully expanding its market presence and becoming more competitive in the pursuit of new business. At the same time we continue to focus on maintaining and controlling our cost and our outstanding customer service and operational efficiency.

Going forward, we expect to continue to broaden and diversify our customer base. We need to keep a careful eye on global economic conditions in coming periods, assessing the impact it may have on our existing customer base, and our new customers coming online.

Yet we continue to be pleased with our progress and believe Key Tronic is increasingly well-positioned to win new opportunities for profitable growth, in fiscal 2009 and beyond.

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

(Operator Instructions). Bill Dezellem with Tieton Capital Management.

Thank you. We had a group of questions. First of all, would you please repeat the comments that you made, relative to the development of the year? I think they were -- censored maybe something that was important that you are saying there, but I didn't fully grasp it.

I think what -- are you referring to me, Bill, or to Jack's comment?

I believe it may have been -- you know frankly, Ron, I'm not sure.

I think we talked about the fact that the new customers were going to represent this year approximately 40% of our revenue which is they only represented 13% of our revenue last year. So that growing -- by the end of the year, not obviously these first quarters but by the end of the year we expect these new customers as they ramp up to be able to offset some of the decline that we are seeing from some of our older existing customers, which we've talked about in previous quarters.

So even though our first quarter is going to be down sequentially, it is going to be up year-over-year. But, that big decline sequentially from the fourth quarter to the first quarter is essentially being driven by a couple of major customers who have as we talked about in previous calls have -- are moving away to another manufacturer.

And relative to the first quarter, it seems -- and correct me if I am off base here -- that there's a pattern that has developed for your business, whereas the first quarter ends up being the low point essentially and then building off of that. Is that essentially what you are also saying that you are anticipate to happen this year Q1 of '04?

I don't think so, Bill. You know it certainly on paper appears to be a pattern. But I think what we are seeing and [to] give you an example, in the fourth quarter we had customers, our existing customer base actually pulling orders in and expediting to get those products out before the end of the quarter.

Those same customers that were expediting last quarter are now pushing their orders out almost to the same amount that they pull them in. So I think it is more reflective of actually what is happening in the economy than any kind of pattern established for Key Tronic.

Right and then in our Q1, as we talked about in previous quarters about one customer loan represents over $7 million decline sequentially from Q4 to Q1.

So --.

Which is unusual. I mean that's not expected. That's not normal.

Okay. That is helpful. Then in addition, the move issue you are making with 18 new customers, essentially you referenced the decrease in customer concentration that we used to in theory that also will be leading to less volatility in the revenue and earnings stream. Are we interpreting that correctly?

(inaudible), we are hoping as we continue to bring a more diversified and you know the long list of products that are high, you know, I commented on certainly our diversified (technical difficulties) compared to where we had been in the past.

That's helpful. Thank you.

(Operator Instructions). A follow-up from the line of Bill Dezellem.

Thanks. So you discussed the new customer wins that you have had and, given the significant number of wins, to what degree do you feel like you have, I guess, depleted your pipeline of new customers and you need to rebuild that pipeline?

I guess at this point we have depleted it somewhat, but if we look at the number of quotes and requests we have for quotes in the pipeline, it is equal to what we had at beginning of last year as we brought all of these customers on board. So our quote pipeline continues to be strong and hopefully we will afford it the same kind of new customer opportunities in the future that we are seeing right now.

And how many new customers did you win in the fourth quarter?

Eight.

In the fourth quarter (multiple speakers) -- ?

And the fourth quarter we had for customers that we've won in the fourth quarter. Those 18 were over the last two years.

And these were actually in the process of going to the [wrap] up stage.

Right.

So if one were to simply draw a line, which is not always appropriate, but it would appear as though your new customer wins are accelerating. Is that how you view what's developing with your business?

Well, I tell you what when we started off two years ago we basically had nine base customers that were generating most of our revenue. Now with 18 new customers we've got basically tripled our customer base in the last two years.

So it's pretty hard to keep that same rate going forward, but as far as percentage gains, but nonetheless the -- we've been pretty successful over the last two years at picking up these new customers and think of (inaudible). Our reputation and is growing and I'd think our low-cost operations in China in Mexico are really making us competitive particularly for customers that seems to be our wheelhouse which is in the $5 million to $15 million range.

And that was something that you highlighted in your opening remarks, one of you did -- that it seems as though that core size customer just does not have an opportunity with many other ems manufacturers to get the offshore strategy and that is really providing you an advantage.

Yes, that is correct.

And maybe that just answered the next question.

I'm sorry. We just cannot hear you.

I'm sorry I said that may have just answered the next question that I have and is that better?

Yes it is.

What is the common thread that explains why you were winning so many new customers? Like I said you may have just answered it.

Yes, I think in the past we had focused on quoting larger opportunities. And right now, a lot of the quotes are in that range with growth potential beyond that.

So our focus has been to, I think as we said, to diversify that customer base not only from the quantity of customers but also industries they are in. And then quote on business where we can be competitive like Ron was saying with our offshore facilities, that really the large ems competitors are not going after.

All right. Thank you both.

(Operator Instructions). Mr. Oehlke, there are no further questions at this time. I would like to turn it back to you for any closing remarks.

Yes. Again, Ron and I would like to thank you for participating in today's conference call and we'll look forward to talking to you again in another quarter and giving you an update of where we are standing on growing our business. Thank you.

Thank you, Sir. Ladies and gentlemen, this does conclude our conference for today. If you'd like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000 using the access code of 11116514 followed by the pound key.

ACT would like to thank you for your participation. You may now disconnect.