Key Tronic Corp (KTCC) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Key Tronic first quarter fiscal 2010 conference call. (Operator Instructions.) I would now like to turn the conference over to Craig Gates, CEO of Key Tronic. Please go ahead.

Good afternoon, everyone. I'm Craig Gates, 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, Washington.

Today we released our results for the first quarter of fiscal 2010. We continue to successfully confront the challenging global economic environment by reducing our costs, while ramping up our new programs for both new and long-standing customers, which has allowed us to maintain our profitability and strengthen our balance sheet.

Our strong financial position and sustained profitability for 23 consecutive quarters have helped us to win additional new programs and further diversify our customer portfolio across a wide range of industries. Despite the current economic uncertainty, we are cautiously optimistic about seeing growing revenue and earnings in the second half of the year as our new programs ramp up.

Now, I would 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 10K, quarterly 10Qs and 8Ks.

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 September 26th, 2009. For the first quarter of fiscal 2010, we reported total revenue of $41.3 million compared to $48.2 million in the same period of fiscal 2009.

As we move into fiscal 2010, the global recession continues to impact our business; yet, we also continue to see gradual growth among our new programs, which represented over 40% of our revenue in the first quarter of fiscal 2010. In the second half of the year, we expect to see increased revenue compared to the first half.

For the first quarter of fiscal 2010, our gross margin was 6.5%. This is down from 7% in the same period of last year. We're pleased with the relatively modest decline in gross margin, despite our lower sales volumes compared to last year. This modest decline is the result of our flexible operating model, which has allowed us to take the necessary steps to reduce our variable operating expense and trim fixed overhead.

Our headcount at the end of September 2009 was under 2,000 people. This is down from about 2,500 a year ago.

In coming periods we expect our gross margins to be around 7%. Over the longer term, however, the economy -- as the economy recovers and we begin growing our total production volumes again, we expect to return our gross margins to around 8%.

We continue to focus on controlling our operating expenses without hurting our long-term competitiveness. Overall, we have reduced our operating expenses by 17% from a year ago. We expect our total operating expenses to be around $2.5 million in coming quarters.

Despite the overall decline in our revenue, and the costs associated with bringing on many new customers, we have maintained profitability for 23 consecutive quarters.

Net income for the first quarter of fiscal 2010 was $300,000 or $0.03 per share, compared to $400,000 or $0.04 per share, for the same period of fiscal 2009.

Turning to the balance sheet, our cash position was $1.8 million at the end of the first quarter of fiscal 2010. While our cash will continue to fluctuate from quarter to quarter, our sustained profitability, active cash management and cost reduction programs have allowed us to both increase our cash position and pay down our credit line to zero.

In addition, we've recently entered into a credit agreement with Wells Fargo Bank, which provides a $20 million revolving credit facility which will be available to fund our working capital needs as we grow in the future.

Our trade receivables were $25.3 million at the end of the first quarter. This is up slightly from the previous quarter. But given the challenging credit environment, we're pleased to see our average days sales outstanding at around 51 days, which is comparable to the same period a year ago.

Inventory was $30.1 million at the end of the first quarter. This is down from $32.3 million at the end of fiscal 2009. In general, we have successfully kept our inventory inline with our revenue levels, even as we have brought on a number of new customers into production.

Finally, our capital spending was $340,000 for the first quarter of fiscal 2010. And we expect our capital expenditures to be around $1.5 million for the full year, with most of the spending related to bringing on our new customer programs and making improvements to our facility in China.

Looking forward, we expect to continue to see gradual growth in revenue contribution from our new programs. In response to the global recession, we are continuing to control our costs, while making the necessary investments to support our long-term competitiveness and maintaining our strong balance sheet.

Taking all these factors into consideration, we expect revenue in the range of $38 million to $43 million in the second quarter of fiscal 2010, with earnings in the range of $0.02 to $0.05 per share. In the second half of the year, we expect to see growth in revenue and earnings, though the overall economic environment continues to create uncertainty.

Over the longer term, we believe that we are well-positioned to profitably expand our business as the overall economy rebounds.

That's it for me, Craig.

Okay. Thanks, Ron.

While the global economic situation continues to impact our business as we move into fiscal 2010, we are pleased with our continued success at controlling costs, managing our inventory, strengthening our infrastructure, eliminating our debt and diversifying and growing our customer base. These combined initiatives have allowed us to remain on track and profitable and in an excellent competitive position to continue to grow our business as the economy rebounds.

As we've discussed in recent quarters, the ramp-up for our new programs was slowed by the recession, but these new programs continue to represent a growing portion of our revenue and a promising foundation for our future growth.

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.

Our strong financial position and sustained profitability continue to help us win new programs in a very competitive and economically uncertain environment. During the first quarter we won new programs involving specialty printers and data storage systems. We expect both of these recent wins to begin moving into production during fiscal 2010. When they reach full production, these latest program wins each represent a potential revenue contribution of $5 million to $10 million annually.

Even in the current economic environment, the pipeline of potential business remains relatively robust and the long-term trend towards outsourcing continues to look encouraging. While the recession may have initially put some potential customers' outsourcing plans on hold, many of these companies are now recognizing the growing need to move forward with their outsourcing strategies to improve their long-term efficiencies and operational flexibility.

In the face of this severe recession, we believe Key Tronic has continued to strengthen its position. We continue to see our prospective and current customers place increasing value on the initiatives that have been at the core of our strategic efforts.

Our focus on creating and growing world-class manufacturing sites in three geographic areas allows customers to choose from a menu of attributes and create the best possible supply chain for their unique businesses. They increasingly recognize our strong centralized management approach to inventory, IP, production control and engineering, which has been honed and refined over decades of operating offshore facilities.

As OEMs have struggled with IP control, assurance of supply issues and product launch delays with stand-alone and independent foreign sites, our approach has become a clear competitive advantage in many of our recent program wins.

As we move into fiscal 2010, we're taking steps to further strengthen our competitive position. First, we're enhancing the efficiency of our supply chain and our new product introduction process.

Secondly, we're investing in improvements to, and expansion of, our facility in China. While most of our production will continue to take place in Mexico, China represents an increasingly important part of our operations mix.

In the case of many programs, we are providing design services in Spokane; building prototypes in Spokane; ramping production in both China and Mexico; cross supplying parts for production from China, Spokane and Mexico; and controlling the production, planning and delivery from Spokane.

This type of seamless blending of the advantages of each locale is not readily available to our customers from our tier three competitors, and the value of this blend is becoming more of a competitive advantage as the marketplace gains experience in outsourcing. Also, in the marketplace, we're seeing more potential customers moving forward with outsourcing and we're more strongly positioned than ever before to win new business.

We're very pleased to be moving into fiscal 2010 with no debt, cash in the bank and a new credit facility. Our conservative approach to managing financial and business risk continues to be a source of strength. We have continued to win new customers and win new programs from existing customers based upon our stability and performance.

Going forward, we continue -- 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. We are cautiously optimistic about seeing growth in the second half of the year. As the economy recovers, we remain confident in our ability to grow our revenue and profits over the long term.

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

(Operator Instructions.) Our first question comes from the line of Bill Dezellem. Please go ahead.

Thank you. A couple of questions. First of all, the significant cost reductions that you have done, how much if any of those can be kept when your revenues do begin to increase?

Quite a few of those are going to be still in place as we increase revenues, because they're not just cutting of people that's inline with revenue reduction and the loss of hours in the factory. They're more in tune with a change of operational facility and structure, operational philosophy and structure in our factories and in our offices here in Spokane. So, they ought to have -- they ought to be something that would increase less than you would expect as our revenues come up.

So, as a result, there should be some pretty significant earnings leverage when you do get some revenue growth.

Yes, that's correct.

And speaking of the revenue growth, you have referenced the second half of the year that you do expect to see revenue growth. Would you go into some more detail, please, as to what gives you confidence in the existing customers' revenue growing in the second half? And then, whatever insights that you can share quantitatively about your new customer revenue growth that you would anticipate, or I should say new program growth you anticipate in the second half.

So, the way we're looking at the next six months, in order to build our projections and models, is to assume that the economy doesn't get any worse, but also doesn't get any better. So, the revenue growth that we're confident in predicting is based upon the programs that we won, which we've discussed in the last conference call and in this one.

Those programs are all in the various phases of being implemented into our factories in China and Mexico. As you know, it can take anywhere from six months to a year to remove a program from a customer or a competitor's facility and ramp it up in our facility.

So, the reason we're confident in predicting growth in the second half -- again, that confidence is based on the assumption that the economy doesn't suddenly get worse on us. But we have new programs that are pretty far along the path of being implemented, contracts are signed, and we're very confident that these programs are going to turn into revenue before the year ends.

Okay. Then, relative to the existing customers, the confidence that you have there, or what is it that's giving your confidence that existing customers will see a ramp, especially if you are presuming no improvement -- or no change in the economy?

Well, if I said we were going to see a ramp on existing customers, I misspoke. We are planning the existing customers to stay about flat.

We have won some additional programs from existing customers--.

Right.

-- that Craig was talking about, but the base business is remaining flat.

Okay. So, the sentence in the press release where it makes reference to increased production levels of new programs for both new and long-standing customers, the key here is to understand that it would be the programs that would be new for those long-standing customers --.

Yes. You're exactly right.

-- but not existing programs ramping.

Yes. You're exactly right.

Okay. That's helpful. Thank you. And therefore, just to make sure we fully circle this issue, that if in fact there is an improvement in the economy and existing customer existing programs do see revenue growth, then that's incremental to what you're currently thinking.

Yes.

And then the guidance for the second fiscal quarter. Well, actually, let's circle back to this quarter, to the guidance that you gave for the first quarter. I believe your revenues actually hit the low end of the guidance, but your earnings hit the high end of the business.

What happened within the business model that allowed for additional earnings flowing to the bottom line? And where was it that you saw revenues be a little bit slower in the September quarter than maybe what you might have hoped for, assuming that the low end isn't what you were hoping for?

Well, there's a couple, three questions in that paragraph you just asked me there. The first one is the revenue, lower rather than higher, is a result not of a lack of demand, but of lack of availability of components.

I don't know if what we're seeing is typical, but I'm hearing that it is. And what we're seeing is that a number of the component suppliers don't have a lot of faith in this recovery. And so, any little blip in orders is responding in increased lead time rather than increased output from those suppliers.

Very few people are actually adding manpower back to their factories. And, as a result, if we do see a jump in demand from one of our customers, our ability to go out and get some selected parts is limited by those suppliers' willingness to add people. And they're just not willing to do it at this point.

So, that's what's holding our revenue back and making it a little tough for us to predict where we're going to end up. And that's what drove us towards the lower end of our prediction for this quarter.

And in reference to your question about low end of revenue and high end of profit, when we're down in the $300,000, $400,000 profit range, what seems like a huge percentage difference isn't a whole lot of money. So, we're off by a couple pennies a share. A lot of that is really just in rounding error when we're making these predictions.

That's helpful. And so, in essence, you -- had the components been available, your revenues would have been higher than what you actually reported.

Yes.

And to what degree do you anticipate that component availability to be an ongoing issue in the December quarter and, therefore, essentially your guidance for the second quarter is, A, muted due to that and, B, maybe a little wider range than what you might normally be thinking about due to that uncertainty?

If you look back at our historical tendencies to give you guys a window of revenue, you'll see that we've doubled that window, this prediction going forward. And that's all based upon the fact that we're not sure what's going to happen with our component supply.

And it also -- you're correct, it has had a certain bit of a muting on our exuberance in giving you a number based upon the top end, because we're pretty sure that, no matter how good it gets, we're still going to be limited on how many parts we can get our hands on.

Great. Thank you very much. I've taken enough time.

Thank you. (Operartor Instructions.) And I see no questions in the queue. Pardon me, we did have one person queue up. Our next question comes from the line of Anthony Chiarenza with Key Equity Investors. Please go ahead.

Thank you. Good afternoon.

Hello.

Hi. A question about comprehensive income. Noticed, if you look at your balance sheet, the amount of retained comprehensive income went down. Was that foreign exchange?

Yes. If you look, we've taken out hedge contracts on the peso out a little over a year worth of contracts. For our peso denominated costs, we've locked in a rate of around 13.8. And so, that change in comprehensive income was just the value of those contracts as the peso fluctuates up and down compared to the US dollar.

Okay. That's helpful, thank you. Now, obviously, the Company's doing very well. It's impressive under these conditions.

But obviously, the stock price hasn't reacted at all to how well the Company is doing and the prospects of the Company. It's selling well below book and below -- almost actually below liquidation value.

What are the thoughts, your thoughts and the thoughts of the Board, in terms of increasing the value of the stock? Is a dividend a possibility? Is a buyback a possibility? What things are you considering?

Well, we've considered all of those things and we're still considering them. It's kind of a new experience for us to be in a cash position so I think you're going to have to give us a little bit more time to think about what we want to do. But certainly, we have been discussing various options along those lines.

Okay, good. Because obviously, it makes sense. That's a good investment to buy the shares at this kind of valuation. If it makes sense on the cash flow. Obviously, if you need the cash flow for growth or something else, obviously that's a different issue. But good luck. Thank you very much.

Okay. Thank you.

Thank you. And there are no further questions in the queue at this time.

Okay. Thank you again for participating in today's conference call. Ron and I look forward to speaking with you again next quarter. Thank you and good day.

Ladies and gentlemen, this concludes the Key Tronic first quarter fiscal 2010 conference call. You may now disconnect. Thank you for using ACT Teleconference.