Key Tronic Corp (KTCC) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Key Tronic's second-quarter 2009 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, Thursday, January 29, 2009. I would 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 would like to thank you for joining us today for our investor conference call. Ron Klawitter, our Chief Financial Officer, is here with me in our headquarters in the Spokane Valley, Washington.

Today, we released our results for the second quarter of fiscal 2009. We're pleased with our execution and operating performance for the second quarter, which is in line with our forecast. While the global economic situation continues to create slowdowns among some of our existing programs, we saw an increasing revenue contribution from new customer programs. In response to the current market conditions, we are continuing to take steps to improve our operating efficiencies and maintain profitability.

We continue to believe that our sustained investment in our world-class and reliable facilities in North America has provided us a strong competitive advantage. We have also a strong balance sheet, and have structured our business with significant financial and operational flexibility.

Despite the challenging economic conditions, we expect to continue to successfully win new business and further diversify our customer portfolio across the wide range of industries.

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

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-K.

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.

As Jack mentioned, today we released the results for the quarter ended December 27, 2008. For the second quarter of our fiscal 2009 we reported total revenue of $47 million. This is as compared to $50.8 million in the same period of fiscal 2008. For the first six months of fiscal 2009 our total revenue was $95.2 million compared to $95.4 million in the same period of fiscal 2008.

The global economic recession has clearly impacted our long-standing customers across the board in many different industries. [And] our new customer programs, namely those that were not contributing significant revenue at this time last year, continue to move into production and gradually ramp up.

For the second quarter of fiscal 2009, our gross margin was 8%. This is up from 7% in the same period last year. Our strong margin performance reflects the actions we are taking to reduce our variable operating expense and to trim our fixed overhead. As the year progresses, we expect our gross margins to remain around our long-term target of 8%. In preparation for future growth we continue to make the necessary investments to remain competitive while continuing to focus on controlling our operating overhead.

Research and development costs for the second quarter were $592,000. This is down slightly from the $641,000 in the second quarter of fiscal 2008.

Our selling, general and administrative expenses for the quarter were $2.1 million. This is up from $1.9 million in the second quarter of fiscal 2008. It is important to note that the results for the second quarter of fiscal 2009 included a charge of approximately $800,000 or $0.08 per diluted share for goodwill impairment as required under Statement of Financial Accounting Standards No. 142.

Conversely, the results for the second quarter of fiscal 2008 included a gain of approximately $1 million or $0.09 per share from the sale of a facility. In the coming quarters, we anticipate holding total operating expenses to around $2.7 million per quarter.

Despite the anticipated decline in revenue from existing programs and the challenges and costs of bringing on so many new customers, we still managed to maintain profitability. Net income for the second quarter of fiscal 2009 was $100,000 or $0.01 per share compared to $1.6 million or $0.16 per share in the same period of fiscal 2008.

The first six months of fiscal 2009 net income was $0.5 million or $0.05 per diluted share compared to $1.8 million or $0.18 per diluted share for the same period of fiscal 2008. It is important to note that excluding the charge for goodwill this year and the benefit from the sale of the facility last year, we would have reported significant improvements in our profitability.

Turning to the balance sheet, our trade receivables were $29.5 million at the end of the second quarter of fiscal 2009. This is up from $28.3 million at the end of the prior quarter. Reflecting the fact that a good portion of our sales activity came late in the second quarter.

Our average days sales outstanding at the end of the quarter was 48 days. This is down slightly compared to recent quarters. Inventory was at $37.6 million at the end of the quarter. This is down from $39.7 million at the end of the previous quarter. We're very pleased with our efforts to bring our inventory in line with our revenue levels even as we bring on new customers into production. Our capital spending was $134,000 for the second quarter and we expect CapEx for the full year to be approximately $1.5 million.

In summary, we continue to see a decline in revenue from existing programs, partially offset by increased revenue from our new customers, as we expect to see continued gradual growth in revenue contribution from our new customer programs in the coming periods.

Moving into the second half of fiscal 2009, the overall economic environment continues to create uncertainty. At the same time, we have to continued to make the necessary investments to support our long-term competitiveness, control our costs, and maintain our strong balance sheet. In the third quarter, we're taking steps to further streamline our operations, and we will have some additional costs associated with ramping up new programs.

Taking all of these factors into consideration, we expect revenue in the range of $42 million to $46 million, with earnings in the range of breakeven to $0.02 per share in the third quarter of fiscal 2008.

Over the longer-term we believe we are well positioned to weather this current economical storm and profitably expand our business. That is it for me, Jack.

Thanks, Ron. While the global economic situation has certainly impacted our business, our strong balance sheet, flexible manufacturing, and diversified customer base makes us capable of remaining competitive and well positioned for long-term growth. For the last two years, we have won new customer programs involving data storage devices, network equipment, specialty printers, industrial equipment, personal exercise equipment, specialty display panels, scientific instruments, security surveillance equipment, customer medical devices, energy technology, specialized touchscreen panels, telecommunications and consumer products. These new programs represented about 21% of our revenue in the second quarter. We expect the revenue contribution from these new programs to grow about 30% of our revenue in the third quarter.

Moving into the second half of fiscal 2009, we expect more of these new customer programs to come online. In keeping with our long-term strategic objectives, we are successfully building a more diversified customer portfolio in a less-concentrated revenue base, spanning a wider range of industries.

While it continues to take a long time between winning a new program and seeing that program actually go into production, we believe our new programs will have a positive impact on our business over the long-term.

Even in the current economic environment, the pipeline of potential business remains relatively robust and long-term trend toward outsourcing continues to look encouraging. In fact, we have seen a boomerang of potential accounts that have previously not selected Key Tronic. Many of these are now reexamining that decision in light of our proven staying power, wide range of capabilities, relatively strong financial position, and efficient, flexible manufacturing.

Unlike some of our competitors which have not taken on -- we have not taken on significant debt and business risk in the recent years. And many of our larger competitors have focused exclusively on China sourcing. With the disruptions, risks, product cost increase associated with China production, many domestic OEMs are beginning to more fully calculate the true cost of delivered product in discovering the advantages of sourcing to Mexico. This is particularly true in the case of smaller and mid-sized programs with production runs in the range of 5 to $10 million annually.

Most of the EMS competitors comparable to our size -- what the industry refers to as tier three EMS providers do not have offshore capabilities. Thus our focus on building world-class facilities in both Mexico in China has contributed to winning new business to more efficiently handle our customer demand and to provide flexibility and scalability for the future.

In summary, we continue to feel confident about our EMS strategies and our long-term growth potential despite the current economic challenges to our long-standing customers and the general uncertainty of the marketplace, we are continuing to gradually bring new customers online and see new customers contribute a growing portion of our revenue.

Our flexible business model allows us to take immediate steps to reduce operating expenses at our manufacturing facilities and still maintain our outstanding customer service and operational efficiencies. We also believe Key Tronic is becoming more competitive in the pursuit of new business.

Going forward, we expect to continue to work to control our costs and maintain our operational efficiency and excellence, even as we continue to broaden and diversify our customer base.

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

Bill Dezellem, Tieton Capital Management.

First of all, would you detail what, if any, new business that you won here in the second quarter?

Yes, Bill. In the second quarter, we haven't added any new customers to our portfolio. But going into the third quarter, it is looking pretty strong. We're pretty close on a number of quotes that we've got out that we expect to be awarded business in the third quarter -- additional and new customers in the third quarter.

Thank you. And then relative to the revenues, $47 million -- that's higher than the guidance that you had of $42 million to $45 million about three months ago. What accounted for that difference?

I would say the new customers coming on stronger and faster than what we anticipated, because some of our long-standing customers actually came in less than what they had been forecasting. So that was the fortunate thing that these new customers we have been talking about the last few conference calls are finally coming to fruition and taking up the slack.

This economic environment is really kind of hurting some of the industries in which our customers operate, particularly the banking industry. And fortunately, these new customers that we have picked up coming on board stronger than we anticipated was able to help us overachieve our revenue. (multiple speakers)

I'm sorry; please go ahead.

And within our factories, Bill. We were successful in ramping a little quicker than we had anticipated working with the customers. We saw the revenue a little bit sooner than later.

That is helpful. And then there was a reference -- I think it was in regards to accounts receivable, that you had had more revenues later in the quarter. It is that an indication by some chance of something positive happening that maybe has spilled over into the month of January?

It really was related to getting materials in, our customers changing their forecasts. So we had to back-end load our production until we get the materials or the pipeline and get it on board. So that was more of a reason for that back-end loading of the revenue.

And that did not continue into January.

Yes.

You said is or is not?

Did not.

Did not.

Right, okay. That's helpful. And then relative to your revolver, you still have that categorized as short-term. I believe that that comes due later -- late fall, probably late summer, early fall, somewhere in that timeframe. Would you please discuss the revolver and either your plan or strategy surrounding refinancing?

The revolver expires late August of this year. The reason we have not refinanced at this point -- we have a provision in our loan agreement with our current lender that says if we terminate the agreement early, we have to pay a prepayment penalty, which we don't believe we want to pay, particularly since the interest rates that we have under that loan agreement are substantially less than what the current market is. We're currently borrowing at less than 3% interest. And I know that the market would be somewhat higher than that today.

So given those two factors, we decided to wait until the agreement expires at the end of August before we refinance. We have gone out into the marketplace. We don't have any firm commitments, but I feel confident that we would find alternatives to our present lender if they decided not to renew our loan agreement.

So I think the financial performance that we just demonstrated here in the second quarter -- if you take away the goodwill, which is a non-cash charge, we made almost $1 million, even with this lower revenues and this economic environment. And being able to maintain profitability I think is going to work well for us as we go into the process of renewing our loan agreements.

So I hope that is enough information for you. But I feel pretty confident that we're going to be able to get a pretty competitive replacement for the loan agreement.

Thank you. That was very helpful. And I have one more question before I go back in the queue. I think that Jack had mentioned that some of the customers that you had bid on business in the past and had not won -- that some of that lost business is or has come back to reevaluate Key Tronic again. And you made some brief comments about that. But would you please expand upon what you're seeing there and just how prevalent that is?

I think, Bill, what's actually happening in the marketplace is that, like we've said, the customers are looking at the total cost of outsourcing and what it takes to bring it back, what those lead times are. If you go to China, it's definitely a longer leadtime if you're going to put it on a boat and be cost competitive bringing it back. And you put it on a plane, but then you lose all of that advantage and cost. And they are reevaluating their position as far as where do they want their product sourced. So they have actually come back to us, and we are in the process of re-quoting some of the business we had quoted a year or two years ago.

Some of the things that we told them back then, the problems they're probably going to experience if they go with the decision they were making, they exactly -- that's what they experienced -- in either quality, or not the flexibility they are looking for. As Jack mentioned, made a lot more cost for expediting; not working with somebody that works in your time zone, that speaks your language -- those are all advantages that we have. We can offer them the China cost, if that's what they wish, or Mexican cost, that you are dealing with US people, speak English, and in the same time zones that you are. All of those things go into the total cost of delivering the product.

Great. Thank you both and good luck winning some of that business.

(Operator Instructions) Bill Dezellem.

Well, thank you. I was hoping maybe there might be someone else there. But relative to the new business that began ramping in the second quarter and the new business that's ramping in the third quarter, it sounds like there will be more new business ramping in the Q3 than did ramp in the Q4. Is that a correct interpretation of your comments? And how would you characterize the new business that you are anticipating to ramp in the June quarter?

Well, first of all, we have not talked about the June quarter. We're just talking about the March quarter, Bill. With this environment, this economic environment, this really doesn't make any sense to go beyond what we can see coming the quarter coming up.

But as we mentioned, as Jack mentioned in his comments, about -- a little over 20% of our revenue in our Q2 came from these new customers. We expect our revenue from Q3 to be over 30% of our revenue coming from these new customers.

And so even at flat revenues, sequentially flat to down a little bit, and having the new customers taking even a greater percentage of those revenues, you can see the impact on those new customers on our business.

And are you find in the current economic environment that the new customers are wanting to ramp more quickly, or is that accelerated ramp that you guys mentioned earlier -- was that more a function of Key Tronic's execution that just allowed the ramp to happen faster?

It's really execution and our ability to produce a quality product to their specifications or, like Ron was mentioning, if we do have some problem working with their engineers to resolve those so we can meet the cost targets we both set in moving this in. So in this case, it was -- we were able to accelerate it.

Part of the thing we are seeing to is that the new customers are adjusting their forecasts just like our existing. So I think it's important to have the new customers come onboard, but it is probably not going to be -- I think at the revenue levels, it seems like every customer is out there suffering with what their revenue plan should be.

And as you look at prospective customers or existing customers that are looking at bringing new programs to you, are you finding that this economic environment is causing them to make decisions at a different speed, either more quickly or more slowly?

I think we see it both ways. We've gotten some where they intend to award us the business, but now it's not going to come in as fast, because they are sitting on a lot more inventory than what they anticipated because of the slowdown. So business that we could have maybe picked up even in the Q4 is not going to happen that quickly.

On the other hand, I know some customers that would be looking at the fact that, gee, I've got to get my costs down. I got to get rid of my fixed operating expenses. And the only way to do that is to accelerate the outsourcing of the business.

So you see, it's a mixed bag. We're seeing both things happening, Bill.

All right, that is helpful. And if I remember correctly, at least in past years, the December quarter, you've had some revenues that have been specific to the Christmas build. How much of that was in the second quarter? And the reason I am asking is trying to understand -- with essentially flat revenues in the March quarter, flat to down versus the December quarter, how much are you actually needing to make up to achieve your guidance?

That was in the [past] really related to the toy industry. And we don't see any of that going forward.

And we don't have very much of that business in our second quarter. So we don't see that -- much of our business was related to the Christmas seasonality.

(Operator Instructions) And we have no further audio questions at this time. I would like to turn the conference back over to Mr. Oehlke for any closing statements.

Okay, well, Ron and I would like to thank you again for participating in today's conference call and we look forward to speaking to you again at the end of next quarter. So thanks again, and just have a great day.

Ladies and gentlemen, this does conclude the Key Tronic second-quarter 2009 conference call. If you would like to listen to a replay of today's conference, please dial 800-405-2236 or 303-590-3000 with the passcode 1112-4551. ACT would like to thank you for your participation, and you may now disconnect.