Key Tronic Corp (KTCC) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Key Tronic third quarter fiscal 2009 conference call. (OPERATOR INSTRUCTIONS.) This conference is being recorded today, Tuesday, April 28th of 2009. I would now like to turn the conference over to Mr. Craig Gates. Please go ahead, sir.

Good afternoon, everyone. I'm Craig Gates, the new 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 in our headquarters in Spokane Valley, Washington.

For those of you who do not know me yet, I've held senior management positions in marketing, engineering and business development at Key Tronic since 1994. Until recently, I was serving as Executive Vice President and General Manager of the Company.

Going forward, I'm excited about the opportunity to lead our outstanding team and continue to successfully execute the strategic objectives that Jack pursued with such determination and skill. Our company has a great foundation for profitable, long-term growth.

Today we released our results for the third quarter of fiscal 2009. Our operating performance for the third quarter slightly exceeded our forecast.

Like many of our EMS competitors, we continue to see slowdowns in orders among our existing programs. Customers whose products compete in gambling, banking, finance and retail industry segments were severely impacted. However, what might have been a perfect storm 5 or 10 years ago when our customer base was more concentrated is today a challenging period through which we can manage and emerge even stronger.

The new programs and customers we have discussed in previous calls have served to partially offset the effects of this recession. And while the revenue growth for many of our new programs has also been slow due to the recession, all those new programs continue to move forward.

Despite the challenging economic conditions, we continue to pursue and win new business and expect to further diversify our customer portfolio across a wide range of industries. Our world-class facilities in the United States, Mexico and China provide us with strong competitive advantages. We maintain a strong balance sheet and have structured our business with significant financial and operational flexibility.

Given the challenging global economic environment, we continue to forecast -- continue to focus on reducing our costs and maintaining our operating efficiency and profitability.

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?

Okay. Thanks, Craig.

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 28, 2009. For the third quarter of fiscal 2009 we reported total revenue of $44.2 million, compared to $51.5 million in the same period of fiscal 2008. For the first nine months of fiscal 2009, total revenue was $139.5 million compared to $146.8 million for the same period of fiscal 2008.

As we anticipated, the global economic recession has clearly impacted our customers across the board in many different industries.

For the third quarter of fiscal 2009, our gross margin was 7.5%. This is down from 8.2% in the same period last year. This decline in gross margin reflects approximately $200,000 for severance charges related to cost reduction efforts we took during the third quarter.

In the face of the slowing demand from many of our customers, our flexible operating model allows us to take the necessary steps to reduce our variable operating expenses and trim fixed overhead. Our headcount at the end of March, 2009 was approximately 2,200. This is down from about 2,400 a year ago. Going forward, we expect our gross margins to return to our long-term target of around 8%.

We continue to focus on controlling our operating expenses without hurting our long-term competitiveness. Our RD&E costs for the third quarter were $533,000. This is down from $679,000 in the third quarter of fiscal 2008.

Our selling, general and administrative expenses for the third quarter of 2009 included charges of approximately $0.5 million for increased reserves on a doubtful foreign receivable. As a result, SG&A was $2.3 million, up from $2.1 million in the third quarter of fiscal 2008.

Together, the charges for bad debt and severance in the third quarter of 2009 had a combined impact of approximately $0.07 per share on our bottom-line results. Despite these one-time costs, the overall decline in revenue, and the challenges and cost of bringing on many of these new customers we talked about, we have maintained our profitability.

Net income for the third quarter of fiscal 2009 was about $300,000 or $0.03 a share, compared to $1.2 million or $0.11 per share for the same period of fiscal 2008.

For the first nine months of fiscal 2009 our net income was $800,000 or $0.08 per diluted share, compared to $3 million or $0.30 per share for the same period of fiscal 2008.

Turning to the balance sheet, our trade receivables were $28.6 million at the end of the third quarter of fiscal 2009. This is down from $29.5 million at the end of the prior quarter, reflecting the slower sales activity in our third quarter.

Given the challenging credit environment, we're pleased to see that our average days sales outstanding holding steady right around 49 days.

Inventory was $38.4 million at the end of the third quarter. This is up slightly from the $37.6 million at the end of the previous quarter. This increase was attributable to one customer who did not take the delivery of finished goods at the rate they had forecasted. We expect to see a reduction of inventory levels in coming periods.

In general, we're pleased with our efforts to keep our inventory in line with our revenue levels, even as we brought on new customers into production and dealt with a rapidly slowing economy.

We had no net capital spending for the third quarter and we expect CapEx for the full year to be approximately $0.5 million.

In summary, we continue to see a slowdown in revenue from existing programs, partially offset by revenue from our new customers. While we expect to see gradual growth in revenue contribution from these new customer programs in coming periods, they're also being impacted by the recession.

Moving into the fourth quarter of fiscal 2009, the overall economic environment continues to create uncertainty. And one of our long-time customers, representing about 5% of last year's revenue, is going away as a result of it being acquired.

At the same time, we have continued controlling our costs while making the necessary investments to support our long-term competitiveness and maintaining our strong balance sheet.

Taking all of these factors into consideration, we expect revenue in the range of $40 million to $43 million, with earnings in the range of breakeven to $0.02 per share in the fourth quarter of our fiscal 2009.

Over the longer term, we believe that we are well positioned to weather the current economical storms and profitably expand our business.

That's it for me, Craig.

Thanks, Ron.

While the global economic situation has certainly impacted our business, we believe that Key Tronic has not been as adversely affected as many of our competitors. Our strong balance sheet, flexible manufacturing and diversified customer base make us capable of remaining competitive and well positioned for long-term growth.

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

While the ramp-up for these new programs has also been slowed by the recession, they continue to represent a growing portion of our revenue and a promising foundation for our future.

Moving into the fourth quarter of fiscal 2009 and looking ahead into the coming fiscal year, we expect more of these new customer programs to come online. In keeping with our long-term strategic objectives, we have been successfully building a 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 a new program and 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 economic environment, the pipeline of potential business remains relatively robust and the long-term trend toward outsourcing continues to look encouraging. During the third quarter we won new programs involving military electronics and computer networking, and two new programs involving telecommunications equipment.

We expect these recent wins to begin moving into production during fiscal 2010. When they reach full production, each program represents a potential revenue contribution of between $5 million and $10 million annually.

As we discussed on the previous call, we continue to see a boomerang of potential accounts that have been previously -- that had previously decided not to select Key Tronic. Many 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, we have not taken on significant debt and business risk in recent years. And many of our larger competitors have focused exclusively on China sourcing. With the disruptions, risks and cost increase associated with China production, many domestic OEMs are beginning to more fully calculate the true cost of the delivered product and discovering the advantages of sourcing in Mexico. This is particularly true in the case of smaller and mid-sized programs with 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 tier three EMS providers, do not have any offshore capability. Thus, our focus on building world-class facilities in both Mexico and China has contributed to our winning new business, to more efficiently handling our customer demand and to providing flexibility and scalability for the future.

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

Our flexible business model has allowed us to take immediate steps to reduce operating expenses in our manufacturing facilities and still maintain our outstanding customer service and operational efficiency. We also believe Key Tronic is becoming more competitive in its 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.

In closing, I'd like to take this opportunity to express, on behalf of the Board and our entire organization, how grateful we are to Jack Oehlke for the role he played in the development and implementation of our EMS strategy over the years. All of us at Key Tronic wish him and his family peace and strength in the days ahead.

This concludes the formal portion of our presentation. Ron and I will now be pleased to answer your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS.) And our first question comes from the line of Bill Dezellem with Tieton Capital. Please go ahead.

Thank you. We had a group of questions. First of all, relative to your original Q3 guidance of $0.00 to $0.02 of EPS, what charges was that anticipating or not anticipating relative to the $0.07 of charges you did have?

Bill, that was -- our guidance did include those projections of the severance pay and for the potential reserve for the write-off of our -- on the receivable.

And your guidance for the fourth quarter, what charges does that $0.00 to $0.02 anticipate?

We've got another approximately $700,000 of severance pay that we're probably going to have to pay out in Q4 as we size our Juarez operation with the business that we have right now.

And then, are you at this point feeling as though that will be the end of the severance charges?

That'll be the bulk of it. There's -- Mexican law has got -- they have different employment laws and severance programs that are mandated by the government. And some of the higher charges is because some of the people who are getting on have a lot longer tenure than what we have done previously.

But we think we have the operation sized right now to the level of business that we're running. So, that $40 million to $43 million now, I think that, to the extent that it stays there or goes up a little bit, I don't anticipate having to take additional charges going forward.

And on that note, of business staying at this level or going up a little bit, would you be feeling as though it's fair to say that your business has stopped getting worse at this point?

Well, I'd say that the rate of decline has certainly decreased. It's pretty hard to say if it's stopped getting worse or not, but it certainly has flattened out, so to speak.

That's helpful. And normally, I would jump back in queue. But given that normally there aren't very much other folks asking questions and, Craig, this is your first time as CEO, we actually have a group of questions that we would like to ask, if that's alright.

Given that you've been with the Company for roughly 15 years now, what is your strategy for building the Company from this point forward?

Well, it's -- my strategy is our strategy. As you say, I've been here for a long time. And Jack and Ron and myself are a pretty tightly knit team. And I don't see any need to change the strategy. It's our strategy. It's not something that we need to look at changing.

Really, that's because it's working. If you look at the last two years, we've had a number of significant wins and those are being masked as the recession drives our existing customers' revenue down. But if you look at the customer list, at whose been added, it's pretty clear evidence that the strategy is working.

And the reason we feel it's really started to work is that we've made some advances in a number of key areas. First of all, this contract manufacturing business is really based on trust. And trust is built within your customers and then it's advertised mainly by word of mouth. So, as we see more and more successful implementations for our current customers, that's also helping to spread the word about Key Tronic.

The other thing that's helping us is that, when you bring new customers into a facility on a tour, there's kind of an existence theorem that operates where, if they can see products that closely approximate what they want you to build, it's a lot easier to make the sale. And when we were first starting out, we could only show them one or two types of products. Now, we've got a factory full of many different types of products. So, that is helping us quite a bit as we implement the strategy that we've had in place.

Finally, our hold capabilities is something we've been working on for years. In this business your quote is really your marketing. And we've had quite a journey that our Market Better materials group has undertaken and is right successfully at the point where our quoting is competitive in both speed and in rate with our competitors. So, that's also been a big help for us.

And then finally, the strategic tools that we have to work with haven't really changed. The biggest one is that, for our size, there's hardly anybody around who has offshore capability in China and Mexico like we do. So, if you're a $5 million or a $10 million size account looking for a home, it's pretty rough to find somebody that can give you offshore pricing and yet be interested in the business like Key Tronic is.

Kind of a tangent to that is that we run the Company from a centralized approach so that, if you get into business with us in Spokane and your business grows and you want to move it to Mexico, you don't have to restart the whole process again like you do in many of our competitors because the plants are managed centrally. All it takes is a phone call to move your product from Spokane to Mexico or from Mexico to China, depending upon hopefully your success in driving your volumes and revenue up.

And then the third one is that there are very few people out there of our size who can bring to bear the level of vertical integration and skills in mechatronics. I don't know if you've seen that term used or not, but it means that -- the ability to do things other than stuff components into PCBs. So, there's very few people of our size that can build PCBs, that can build them into complex products that use the same type of plastics that we hold on site and take out a layer of profit because we are vertically integrated.

Those are all the reasons why we're not going to change the strategy. We're going to keep heading down the path we're headed down.

Craig, with that having been said -- and thank you for the encompassing answer -- do you believe that you are fully exploiting your competitive advantages as of today?

Well, you're always limited by how much money you can bring to bear. I'd like to have 400 sales guys, one in every county. But where we are right now we think is a good balance between what we can afford to spend on sales and marketing and what we can afford to process through the quote funnel and what we can afford to put into the factory.

And one final question and then I will get off. What do you view to be the Company's biggest problem or challenge at this point and how do you address it?

Well, I think it's -- that's a give-me question. The biggest challenge is the recession. And the way we've addressed it and continue to address it is to stay lean, stay tight and make sure we've got a margin for error between our revenue and our profit numbers so that, if things do take a turn for the worse, we don't have to panic. And yet, not get so thin that, as things start to come back, we'd let our customers down as they want to increase their revenues.

Great. Thank you both.

Thank you. (OPERATOR INSTRUCTIONS.) And I'm showing there's no further questions in the queue. I'll turn it back over to management.

Okay. Well, thank you for participating in today's conference call. Ron and I look forward to speaking with you again. Thank you and have a good day.

Thank you, sir. Ladies and gentlemen, if you would like to listen to a replay of today's call, please dial 303-590-3000 or 800-405-2236, enter the passcode 11130264. Once again, those numbers are 303-590-3000 or 800-405-2236, enter the passcode 11130264. Thank you for your participation. You may now disconnect.