Key Tronic Corp (KTCC) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Key Tronic first-quarter 2009 conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (OPERATOR INSTRUCTIONS.) This conference is being recorded today, Tuesday, October 28, 2008.

We'd now like to turn the conference over to Jack Oehlke. Please go ahead, sir.

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.

Today we released our results for the first quarter of fiscal 2009. We are pleased with our performance for the first quarter, despite the challenging economic environment we live in. As expected, we saw an increased contribution from new customer programs, partially offsetting the anticipated decline in some of our existing programs. While the global economic situation is creating uncertainty and slowdowns among some of our customers, our flexible business model allows us to take immediate steps to reduce our operating expenses. We continue to believe that our sustained investment in our world-class facilities provides us a strong competitive advantage. Over the long term, we expect to continue to successfully win new business and further diversify our customer portfolio across a wide range of industries.

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 our 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 web site.

Today we released the results for the quarter ended September 27, 2008. For the first quarter of fiscal 2009 we reported total revenue of $48.2 million. This is up 8% from $44.6 million in the same period of fiscal 2008. Our new customer programs contributed about 21% of our total revenue in the first quarter of fiscal 2009. While most of our promising new customer programs continued to move into production and ramp up, some customers have reduced their forecasts for coming periods. Revenue from our new programs is expected to continue to grow in fiscal 2009, but at a slower rate than previously anticipated.

For the first quarter of fiscal 2009 our gross margin was just over 7%, up slightly from the same period last year, but lower than our target of around 8%. Our strong margin performance in previous quarters gives a good indication of the kind of incremental profit we can achieve as we grow our business. Given the expected slowdown in coming quarters, we are taking action to reduce our variable operating expenses and trim overhead. As the year progresses, we expect our gross margins to return to our long-term target of around 8%.

In preparation for future growth, we continue making the necessary investments to remain competitive, while continuing to focus on controlling our operating overhead. RD&E costs for the first quarter were $626,000, down slightly from $677,000 in the first quarter of fiscal 2008. Our selling, general and administrative expenses for the quarter were $2.1 million, up a little bit from the $1.9 million in the first quarter of fiscal 2008. In coming quarters we expect holding our total operating expenses to around $2.8 million per quarter.

Despite the anticipated decline in revenue from some of our existing programs and the challenges of bringing on many new customers, we still managed to improve our year-over-year profitability. Net income for the first quarter of fiscal 2009 was $400,000 or $0.04 per diluted share. This is up from $200,000 or $0.02 per diluted share for the same period of fiscal 2008.

Turning to the balance sheet, our trade receivables were $28.3 million at the end of the first quarter. This is down from $36 million at the end of the prior quarter, reflecting our sequential decline in revenue. Our days sales outstanding at the end of the quarter was 50 days, which is comparable to recent quarters. Inventory was $39.7 million at the end of the first quarter. This is up from $37.9 million at the end of the fourth quarter of fiscal 2008. Increase in inventory in the first quarter reflects inventory increases to support our efforts to bring our new customers on line.

Our capital spending was $100,000 for the first quarter, and we expect our CapEx for the full year to be approximately $1.5 million. It is significant to note that we continue to maintain one of the highest returns on invested capital in the industry, with our ROIC close to 13% in fiscal 2008.

In summary, our year-over-year growth reflects increased demand from our new customers. As we discussed, we did see an expected decline in revenue from some existing programs and, while we expect to see growing revenue contribution from the new customer programs, this ramp-up is now expected to be slower than previously anticipated, due to the global economic situation.

Moving into fiscal 2009, the overall economic environment continues to create uncertainty. 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.

Taking all these factors into consideration, we expect revenue in the range of $42 million to $45 million, with earnings in the range of breakeven to $0.02 per share in the second quarter of our fiscal 2009. Over the longer term, we believe that we are well positioned to profitably expand our business.

Okay, that's it for me, Jack.

Okay. Thank you, Ron.

While the global economic situation gives us poor visibility for the second half of fiscal year 2009, we continued to make good progress during the quarter in diversifying our business across a wide range of customers in different industries. Over the last two years we have won new customer programs. And it's quite a long list, but I think it gives you the breadth of what we've actually won -- updated storage devices, networking equipment, specialty printers, industrial equipment, personal exercise equipment, specialty display panels, scientific instruments, security surveillance equipment, consumer medical devices, energy technology, specialized touchscreen telecommunications, and consumer products.

While we typically cannot disclose information about our customers or their programs, we did announce a new important win during the first quarter. We will soon begin a new manufacturing program with Kaz, Incorporated, a worldwide leader in consumer health and home and garden products. Over the long term we expect to add several other Kaz product programs. While the combined Kaz programs aren't in full production, they are anticipated to contribute over $25 million to our annual revenue.

We intend to perform the manufacturing operations for Kaz programs in our primary manufacturing facility in Juarez, Mexico. We are very pleased to be working with a world-class customer like Kaz. Its programs will leverage our strong engineering, account management, and production capabilities. This important new relationship represents the kind of quality programs we are pursuing and winning, which are expanding our customer base and contributing to profitable long-term growth.

During fiscal 2009 we expect a wide range of new customer programs to come in line. In keeping with our long-term investment objectives we are successfully building a significantly more diversified customer portfolio and a less concentrated revenue base, spanning a wider range of industries. While it continues to take a long time between winning the new program and then seeing that program actually go into production, we believe that our new programs will have a positive impact on our business over the long term.

Even in the current challenging economic environment the long-term trend towards outsourcing continues to look encouraging. Moreover, our dual focus on having efficient production capabilities in both China and Mexico has positioned us to benefit, as many OEMs reevaluate their mix of offshore production. Many of our larger competitors have focused exclusively on China outsourcing. With the significant cost increases associated with China production, many domestic OEMs are beginning to more fully calculate the true cost of the delivered product and discovering the advantage of sourcing to Mexico.

This is particularly true in the case with smaller to mid-size programs where production runs in the range of $5 million to $10 million annually. Most of the EMS competitors comparable in size to us, what the industry refers to as the Tier Three EMS provider, do not have any offshore capability. Thus our focus on building world-class Mexico and China facilities has contributed to winning new business to more efficiently handle our customer demand and to providing flexibility and scalability for the future.

In summary, we continue to feel confident about our EMS strategy moving into fiscal year 2009 and our long-term growth potential. Despite the current economic uncertainty, we are continuing to gradually bring new customers on line and see those new customers contribute a growing portion of our revenue. In the near term we expect to ramp up our new customer programs to be slower, due to the uncertain economic world we're living in right now. And our flexible business model, though, allows us to take immediate steps to reduce operating expenses in our manufacturing facilities and still maintain outstanding customer service and operational efficiency.

We also believe Key Tronic has become more competitive in pursuit of new business. Going forward, we expect to continue to broaden and diversify our customer base.

Now this actually at this point concludes the formal part of our presentation, and Ron and I would be more than pleased to answer any questions you may have.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS.) And one moment, please, for our first question. And our first question comes from Bill Dezellem with Tieton Capital Management. Go ahead, please.

Thank you. A couple of questions -- first of all, relative to some new customer wins, did you have any that you consummated in the first fiscal quarter?

Yes. Actually new production began on three new customers in our first quarter and look for the same repeat in the second quarter.

And then did you win any new customers in terms of just signing agreements, not entering into production, but --

Yes. Yes, Bill, there were four new actual customer wins.

And what can you tell us about those, Jack?

Again, we can't really go into a whole lot of detail. But I think the one that we did talk about was Kaz. And we're in the process right now of actually moving equipment. Some of the [presses] they had in their facility have arrived at Juarez and some are still on the road on the way there. We'll have probably well over 150 tools that we have to bring on line. And we're in the process right now of working with them to bring the production to our Juarez facility.

As you're aware, the other ones that we've signed NDAs with we can't really talk about in detail.

Will say one thing that -- I'm not going to name the customer, but we are having -- did win one customer, one program, from a smaller competitor who doesn't have offshore facilities. And so they are going to, as one of their customers ramps up to high volume and they needed to go to a low-cost, offshore location, they're outsourcing that business to us. That seems to be a new avenue for us to look for new business.

Ron, would you explain that again? One of your -- if I heard you correctly, one of your smaller competitors has a customer that wants to move offshore with part of their business, and your competitor is basically hiring you to do that work for them?

Right. So it's -- that's exactly right, Bill. So it's the -- our ability to work with smaller customers -- as they start to grow that competitor does not want to lose the customer relationship. And so we're going to be acting as basically their offshore manufacturer.

That's helpful. And we recognize that Kaz is consumer medical. What type of customer is the one that you're getting from your smaller competitor? And what type of products do the other two new customer wins represent?

Well, we haven't announced them, but they're in the -- one's in the -- I would say in the business environment. It's a product that's used either in education or business applications. And the other two we really haven't gone into the details with them yet, so we don't want to release it at this point.

And then shifting back to Kaz, you'd mentioned that you are moving the equipment. And on their web site, it's clear that they have many, many different consumer medical products, with lots of electronics and lots of plastic. Which of the products are represented with the $25 million of sales that you believe that Kaz could become, and what products are not represented? Because I think I heard Jack mention that there is the possibility for additional product line wins with Kaz.

Right. So we are still quoting on other business that they have that's not -- the primary busi- -- products that we've won are out of their US facilities. So the nine US facilities, still quoting on that.

Yes. We're working with one of their facilities where they've announced a reduction, so it's the consumer and home and garden products.

And all of the US-based products, or just all of the US-based products produced from that one facility?

At this point just from that one facility.

Right.

Great. Thank you.

Okay. Thank you, Bill.

(OPERATOR INSTRUCTIONS.) One moment, please, for our next question. And we have a follow-up question from Bill Dezellem. Go ahead, please.

Okay. Well, actually, let's circle back to the credit or banking side of the equation, since that seems to be a common theme these days. Would you provide insights into your bank revolver, the relationship with the bank, what the availability is at this point, and what factors there are that change the availability that you do have on that line?

The current relationship, it's a $25 million credit line of which we've got about $12 million borrowed and about $8 million of availability. It's all based upon, since it's asset-based lending, it's the -- we have the ability to borrow whenever we need to. Borrow every day; pay back every day. And we have had no problems getting funded by our bank. The agreement does expire in August of '09, so you probably noticed in the balance sheet that the revolver did -- is now up in short-term liabilities, current portion of long-term debt. And so we're in the process of either extending that credit facility with our existing bank and also looking at alternatives in the marketplace right now.

And what qualitative insights do you have relative to the environment, looking to renew or get a new credit line if you choose to move away from your current lender?

We've got a couple of pretty competitive quotes. We've also had some no quotes. So it's a mixed bag out there. Some of the banks do have -- are looking at lending. Some aren't. We've got a pretty good -- and our balance sheet is strong and we've had a pretty good track record. So we don't anticipate any problems getting a pretty competitive renewal, although it probably will not be priced as competitively as our existing agreement. Our existing agreement is pretty low cost and we're borrowing today at Prime at 4.5% and if it goes down we can -- our interest rates will go down. Our average interest rate for between LIBOR and Prime contracts is less than 4.5% interest rate today.

Great. Thank you.

Thank you, Bill.

Thank you. (OPERATOR INSTRUCTIONS.) And one moment, please, for the next question. And, sir, we have no further audio questions at this time. I'd like to turn it back over to Mr. Oehlke.

Okay. Well, thank you. Again, I want to thank each of you for joining us today and participating in today's conference call. Ron and I look forward to speaking to you again at the end of our Q2. So thanks again and have a good day.

Ladies and gentlemen, this concludes the Key Tronic Q1 2009 conference call. If you'd like to listen to a reply of today's conference, please dial 800-405-2236, or 303-590-3000, with the pass code 11120242. ACT would like to thank you for your participation and you may now disconnect.