Key Tronic Corp (KTCC) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Key Tronic fourth quarter and fiscal year end 2010 conference call. During today's presentation all parties will be placed in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions)

This conference is being recorded today, Tuesday, August 17th of 2010.

And I would now like to turn the conference over to Mr. Craig Gates, CEO. Please go ahead, sir.

Good afternoon, everyone. I am 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.

Joining me here in our Spokane Valley headquarters is Ron Klawitter, our Chief Financial Officer.

Today we released our results for both the fourth quarter and full year of fiscal 2010. We are very pleased with our strong growth in revenue and earnings, driven by increased demand from both new and long-standing customers.

We began the year in the depths of a global recession, and ended with the highest quarterly revenue in Key Tronic's history. We have remained profitable for 26 consecutive quarters, and significantly increased our profitability from last year.

As we grew our business and brought many new programs into production, we controlled our costs, maintained strong operating efficiencies, and improved our new product introduction processes. We also continued to diversify our revenue base by winning a new program and significantly expanding our world-class production capacity in Mexico and China.

Based upon our strong financial position and continued success in diversifying our revenue base across a wide range of industries, we believe that we are well positioned to continue to profitably grow our business.

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 10-K, quarterly 10-Q's, and 8-K's.

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 and fiscal year ended July 3, 2010.

For the fourth quarter of fiscal 2010, we reported record quarterly revenue of $61.9 million. This is up 20% from the $51.7 million in the previous quarter, and up 36% from the $45.5 million in the same period of fiscal 2009.

For the full year of fiscal 2010, total revenue was $199.6 million, up 8% from the $184.9 million for fiscal 2009.

During the fourth quarter of fiscal 2010, our business continued to be constrained by industry-wide shortages in the global supply chain, which did reduce our revenue by about $4 million. In coming periods we expect these supply chain issues to continue to impact our business until the world's electronic parts supply ramps up to meet our demand.

Despite the impact of the supply chained constraints, our flexible operating model allowed us to exceed our revenue forecasts and take the necessary steps to adjust our variable operating expenses and overhead to changes in production demand.

Our operating flexibility and higher-than-anticipated production volumes for the fourth quarter of fiscal 2010 resulted in a strong gross margin of 11%. This is up from 7% in the same period of fiscal 2009.

In coming periods we expect our gross margins to be around 9% to 10%.

We continued to focus on controlling our operating expenses while making the investments necessary to support long-term competitiveness. For the fourth quarter of fiscal 2010 our operating expenses were $3.6 million, which was up from the previous quarter in dollar terms, but at 6% of revenue, it was the same as the previous quarter.

We expect our total operating expense to average around $3.3 million in coming quarters.

Our stronger-than-expected revenue growth and higher gross margins, combined with our continued success in controlling costs and improving efficiencies, resulted in an operating margin in the fourth quarter of fiscal 2010 of around 5%, up from 1% in the same period of fiscal 2009.

Our revenue growth and strong margins had a positive impact on our bottom line. Net income for the fourth quarter of fiscal 2010 was $2.3 million or $0.22 per diluted share. This is up from $300,000 or $0.03 per diluted share for the same period of fiscal 2009.

For the full year of fiscal 2010, net income was $8.7 million or $0.85 per diluted share, up from $1.1 million or $0.11 per diluted share for fiscal 2009.

Turning to the balance sheet, inventory was up $3.8 million or about 10% from the previous quarter. The inventory increase reflects orders we could not ship due to the industry-wide electronic component supply constraints and our preparation for anticipated growth in production levels for a number of our new programs.

Our trade receivables were $34.6 million at the end of the fourth quarter. This is up $7.5 million from the previous quarter, reflecting the growth in our business. But given the challenging credit environment, we are pleased to see that our average days sales outstanding remains at around 48 days compared to the previous quarter. Actually, it is comparable to our previous quarter.

Note that we also drew on our credit line of about $1.6 million during the quarter in order to purchase a new facility in Mexico at a favorable price.

Finally, our capital spending was $2.9 million for the fourth quarter of fiscal 2010 and $4.4 million for the full year, reflecting expansion of our campuses in China and Mexico.

We expect our capital expenditures to be around $5 million for fiscal year 2011.

Looking forward, we expect to see continued growth in the revenue generated by our new programs. We also are continuing to control our costs while making the necessary investments to support our long-term competitiveness and continuing to maintain our strong balance sheet.

Taking all these factors into consideration, we expect revenue in the range of $58 million to $61 million in the first quarter of fiscal 2011. Note that our forecast for the first quarter may be impacted by continuing supply chain issues that could result in variances in our results.

We expect earnings in the range of $0.17 to $0.20 per share in the first quarter.

Over the longer term we believe that we are well positioned to continue profitably expanding our business.

That's it for me, Craig.

All right. Thanks Ron.

Fiscal 2010 was a year of tremendous resurgence and growth for Key Tronic. We began the year in the depths of the global recession and ended with the highest quarterly revenue in our history, strong operating performance, a strong balance sheet and significantly increased profitability.

In recent years we have been successfully building a diversified customer portfolio spanning a wide range of industries. This diversification served us extremely well during the recession. Our record revenue of $61.9 million in the fourth quarter was up 36% from the same period of fiscal 2009.

While we saw increased demand from some existing programs, our rapid growth was largely powered by new customer programs ramping up. We've been growing faster than many of our industry peers and steadily capturing market share.

Despite the challenges of the economic recession, industry-wide component shortages in the global supply chain, and new program production ramps, we strengthened our operating efficiencies and dramatically increased our profitability.

Our strong performance outpaced many in our industry, reflecting our conservative management philosophy that focuses on controlling costs and continuously augmenting our production processes.

Our sustained investment in enhancing our production capabilities also continues to set us apart. During the year we expanded our facilities in Mexico, China and the States. By offering world-class manufacturing from three geographic locations, we can optimize the supply chain for our customers' unique businesses. Our expertise in operating multiple offshore facilities, and our centralized inventory, IP, production and engineering management provide significant competitive advantage to our customers.

Our years of sustained effort in creating a flexible cost model in all of our facilities, coupled with our employees' extraordinary commitment to our company, allowed us to cut costs ahead of the reduction in revenue in the curve that happened in the first half of fiscal 2010. Although these cuts were painful, we achieved our goal of remaining profitable and being well positioned to take advantage of a global economic recovery. This rare achievement in our industry has resulted in several significant positive outcomes for our company.

One lesson of the global recession has become increasingly clear -- those EMS companies that continue to invest in their business, execute their long-term strategy, and remained profitable during the downturn, were rewarded with increased confidence from existing customers and increased interest from potential new customers.

During fiscal 2010 we proved our staying power and competitiveness in the EMS market. During the year we won new programs involving telecommunications, industrial controls, specialty printers, motion warning systems, video communications, financial transactions, and gaming equipment. We expect these programs to begin contributing to revenue in fiscal 2011, and each offers a potential annual revenue contribution of $5 million to over $20 million over the longer term.

Moving into fiscal 2011, we have strong business momentum, and recent studies forecast double-digit growth for the EMS market in coming years. We are increasingly well positioned to continue to capture market share and capitalize on emerging opportunities in fiscal 2011 and beyond.

Going forward, we expect to continue to broaden and diversify our customer base, even as we continue to focus on controlling our costs and maintaining our operational efficiency and excellence.

We are optimistic about our potential for growth in coming periods, and increasingly confident in our ability to grow our revenue and profits over the long term.

We owe our success to our great customers, employees, suppliers and shareholders. Thank you for your continued support.

Finally, I want to take this opportunity to say how proud we are of our outstanding people. Key Tronic employees demonstrated their dedication and skill during difficult times of cost reductions and during recent periods of rapid expansion. Our mission statement remains the same -- to provide our customers with superior manufacturing and engineering services at the lowest total cost for the highest-quality products, and create long-term, mutually beneficial business relationships. Our employees continue to live this mission every day.

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

Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions)

Bill Dezellem, Tieton Capital Management.

Thank you. That's Tieton Capital Management.

I'm actually going to ask a few questions, and then I'm going to circle back into the queue and let others have a chance too to ask, and come back with another group.

But I'd like to start, if I may, with the tax changes, reversing the deferred valuation allowance that you did last quarter, and now paying taxes here this quarter. And we really didn't discuss exactly what the meaning of that was for Key Tronic and why you folks did it. We've seen it happen with other companies, but it seems like each company is a little different, the scenario.

Would you please discuss kind of what the dynamics were behind that and really what the implications are going forward, please?

All right, Bill. First of all, we are not paying taxes, as you said, we are recording an income tax expense. But there's a difference. We are not -- we're still not paying taxes, because we have approximately -- after this year, probably have about $25 million of net operating loss carry-forwards that will be used to offset any taxes that we would owe otherwise.

Because our profitability has improved so dramatically this year, and it looks like we are able to project into the future that we're going to be able to continue that level or even higher profitability, we feel confident now that we are going to be able to utilize all of the net operating loss carry-forwards before they expire. So once we came to that decision or that inflection point, then we had to go back and reassess our reserve or our valuation allowance against this future benefit of net operating loss carry-forwards.

And at the end of the third quarter, that's when we made the decision that it was more likely than not in accounting terms that we were going to be able to utilize all of our net operating loss carry-forwards, so we took away -- or we removed the valuation allowance against those deferred tax assets and recorded a one-time benefit through our income statement in Q3.

The results of that is that starting in Q4 and forward, we are going to have to record an income tax expense on our books. But as I mentioned, we are still not paying taxes in the US until we utilize completely all of our net operating loss carry-forwards, which would be about another $25 million worth after this year.

So to make sure that I am clear, this is, number one, a demonstration of your -- and presumably your auditors' -- confidence in your business going forward and therefore having an accounting entry, but has no cash impact on the business?

It has no cash impact on the business. I would like to make sure I stress that these numbers are unaudited, and so they haven't given an opinion on the third quarter or on the -- on our year results yet, but it was discussions that we had with them before we did release that valuation allowance.

Okay, that's very helpful, thank you.

Then I'd like to switch to the component shortages which really reared their head in the March quarter and then continued here in the June quarter. I'd like to get your view as to if the number of components that are under shortage has broadened, if it has narrowed -- just how you see the scope of that and how you are dealing with those challenges, please.

Well, the way we see it, from our business anyway, is it's about as bad as it's going to get. The components that are on shortage always shift, but in terms of new ones coming on and existing ones going off our allocation list, it feels like we are bumping along the bottom. And we are hoping that we are going to see this improve sometime in May of 2011.

A lot of the suppliers that we are working with are telling us that is when they expect to take their parts off of allocation, so -- I wish it was earlier. It's a real drain on us as a company to try and find all of these components. It's a drain on our customers to work with us to try to find a different component to use, and it obviously impacts our revenue. But I don't see it getting better until May.

That's helpful. And then this quarter your revenues were significantly higher than the revenues that you guided for when you reported the Q3. Would you please discuss what the variables were that led to this outperformance?

I think overall the programs that we have been trying to ramp came on a little bit quicker than what we had hoped for, and it is pretty hard to really pin these numbers down when you're looking at plus or minus a couple million bucks out of $60 million. That's pretty precise, actually.

So if you look at the steep ramp of any given program that's in the $20 million or $30 million of annual revenue and you are trying to judge the slope of the ramp and the starting point of that ramp, it's just -- it's tough to get all these nailed down exactly right.

So the major cause was the speed and the slope of the ramps of some of the new programs.

And then your third quarter fiscal Q3 revenues were up 17%. The Q4 revenues were up 36%. And if we use $60 million for the first quarter -- which is within your range -- revenues will be up 45%.

How sustainable are you viewing this rate of growth? This is frankly very significant.

Well, we think it's going to keep growing. We forecasted that it is going to keep growing, and trying to get any more specific than that I think is impossible, based upon all these different ramps we're looking at, and what's going to happen with components.

You know, the market is growing. If you look at different industry publications, it's growing double digits, but the low teens at the highest number I've seen, and so to think that we are going to be able to continue that 45% growth rate over the previous year, some of that is reflecting the fact that the previous year numbers were in the depths of the recession, so it had gone down quite a bit.

So we are -- all we can do is give you the outlook we see for Q1 right now, Bill, and that's showing that on a year-over-year basis, Q1 on a -- at the high end is around like, as you mentioned, around over 40% growth year-over-year.

Beyond Q1, we haven't projected that yet, but that's for guys like you to figure out is what's -- how sustainable is it for us and particularly based upon our track record of what we've been doing.

Thank you. And then I want to make sure I understand the earnings here, earnings-per-share.

The operating earnings-per-share in fiscal 2010, I'm thinking of them as being $0.62, and what I've done there is exclude the tax benefit that you had last quarter, but some of the ancillary, one-time costs that you had throughout the fiscal year, I've just left those in, and came up with $0.62.

Is that similar to the way you're thinking about the business?

I'll tell you what -- a better way to think about the business is try to normalize what our earnings are going to be going forward and the -- with our projections of $0.17 to $0.20 for next quarter, we are assuming a tax rate in the range of 30% to 32%.

If you look at our Q4, that's an effective tax rate of about 24%, so it's going to be a few percentage points higher going forward, but that is a better way of looking at it, other than trying to go back because of the -- if you go back and try to look at what we did for the full fiscal year of 2010, we had a couple of quarters there where we didn't have hardly any income tax expense. We had the third quarter, as you mentioned, that had the big credit. The Q4 is more normalized, which you [should] -- expecting to see going forward.

Okay. Well, all right, that's an interesting point. The way I was going to look at it is if we took -- at the end of the first quarter, assume that you did the high end of your range, which you had a point of meeting or beating guidance, that would put you at roughly an $0.80 trailing four quarter run rate, but in that sense I guess another way to look at it is, you would be operating roughly at a $0.20 per quarter run rate, or -- again, gets us to that $0.80 per year, but on that basis, fully taxed.

Yes. If you take a look at our Q1 and just take that and repeat it three more times, that's what we would be at.

Okay. And so you (multiple speakers)

And that's assuming that there's no growth during the year.

Which, from what I sense you're saying, that's not what you're expecting. You are looking for growth.

Well, we are, yes. As we Craig mentioned, we are expecting and we are looking for growth. We got a pretty good pipeline of business that we are quoting on. Just pretty -- it's hard for us to predict how much and what will come in and when, at this point.

Okay. And a couple more quick questions before I step out for a moment.

The first one is, you announced that you won three new pieces of business or three new programs in the quarter. What are the size of those new business wins?

I think we announced and it said one new business win, and we have a hard time anymore, Bill, telling when we won them, because do you count them when you shook hands? Do you count them when you signed the contract? Or do you count them when you actually get the first PO? So I've kind of given up on the whole process of telling you guys how much -- how many pieces of new business we won in this quarter versus last, because I can't really tell until they are actually in the factory generating revenue.

Now, in the press release, though, I think you said a new program involving gaming technology and two new programs in industrial safety.

Yes.

Yes.

Yes, we did.

Some of those were -- but new programs but not new customers. (multiple speakers)

Okay. So let me ask about those three items -- I'm thinking one gaming, two industrial safety -- one plus two gives us three. What's the size of those rascals? In the past you've gauged those for us.

Between $5 million and $20 million.

Okay, that's helpful. And the industrial safety wins, I thought that's a new category. I don't recall you folks ever referencing safety wins -- industrial safety, that is.

Yes, that's true.

Can you discuss those wins for me, please?

I don't think so.

It's governed by an NDA, and it's -- all we can say is that it's a product that's used in industrial safety of equipment.

Okay, thank you. And then, you did reference in your opening remarks and the release a significant expansion -- I think you actually used the word "significant" in the press release -- in both Mexico and China.

Would you please provide some more color and discuss not only what you did from an expansion standpoint but what it is that you are trying to accomplish there?

Well, when you look at the space we need to absorb the new programs we've won, we were out of space in both Mexico and in China.

In Mexico we bought 100,000 -- roughly 100,000 square foot of factory, and we have been really -- we've really been enjoying the down economy in a certain sense because we have been able to buy factories that are right next door to our existing campus in Juarez. So this factory is probably 100 yards from our facility one in Juarez. Then we've got an option on a second facility a little bit smaller that's even closer.

So that's what we've done in Mexico.

And then in China we've found it's much more efficient to lease, so we've leased a building right across the street from our existing building. And again, that is to absorb a new program -- a couple of new programs that we are putting into China.

Then in Spokane, because industrial space is so depressed right now, we were able to move upstairs and expand the square footage that we have under lease here, so we've got a better NPI facility that we are putting in place now here in Spokane to service customers with new products that are getting first time builds here in Spokane and then move either to Juarez or to China.

Great, thank you. Finally -- and I will jump out and then -- but I am going to come back, if that's all right -- were there any one-time costs experienced in the quarter?

No, there were not.

Okay, thank you.

(Operator Instructions) Buzz Heidtke, Midsouth Investment Fund.

I wanted to ask you about your R&D. Do you try to spend maybe about a little -- 1% of sales on R&D? Or is that going up or down or what?

Well, we've been kind of pulled into adding more engineering resources. We believe that we have the capability to provide more engineering services than we have to our customers. And where we have added engineers -- and I believe we're going to continue to do that -- but how much of that is going to turn into an expense versus a rebillable has yet to be seen.

I suspect that -- our plans, anyway, are that it won't turn into expense, it will mainly be rebilled.

So if you look at that -- if you look at our numbers that -- just on the raw numbers, it's running a little over 1% of revenue, but the amount that we spend on R&D is really reflective of how much business we have, because we do provide services for our customers, a good portion of which they do reimburse us for. So as our business grows, you'll see the R&D dollars go up, and -- but we will -- as Craig mentioned, we do -- are able to charge our customers for quite a bit of that engineering expense.

Okay, thank you.

We have a follow-up question from the line of Bill Dezellem.

And I guess given so few other folks are asking questions, I'm going to take the unorthodox approach of saying that if you get tired of my questions, maybe just let me know that it's time for one more question and call that good.

Would you please discuss the existing customer order rates? And I am partially asking that question to get my -- to get your view on the economy and -- just given all the mixed signals that are out there.

I'm don't -- I'm not an economist. All I can talk about is what's happening to our customers. What we see is a mixed bag. There are some that have been largely unaffected by the recession and have hit their plan within a percentage point. There are other large customers that have been off by 50%, 60%.

We haven't seen those customers that were really hurt by the recession come back in any significant way. They have stabilized and they have maybe bounced up a little bit, but there is in our customer base no broad recovery that you can point to and say that everybody is coming back to where they were.

If we hadn't won all the new business that we have now, we would be significantly lower revenue based upon our existing customers that were in place before the recession started.

Speaking of the new customers that you have won, are you seeing that the prospects or prospective customers are coming to Key Tronic in new ways, or you are finding those potential customers in new ways compared to the past?

The channels we have now are the same as they have always been. There's a couple of differences.

One is that as we've succeeded in the EMS industry over a number of years, we get a natural word-of-mouth of an employee of a satisfied customer who goes to work for a new prospective customer, and so we don't have to dig every opportunity out from under the rocks, like we used to have to do at the beginning of this transition. So that's one trend that we see -- we see continuing to accelerate.

Then the second I guess trend that's going on is that we've done a lot of work in our procurement department over the last two years, and we have our materials quoting process a lot more proficient than we were in the past. So the opportunities that the sales force generates are -- a higher percentage of them are turning into won business based upon our ability to quote them close to correctly the first time.

All right. And then I think in the opening remarks, there was a reference to the new prospect or new inquiry pipeline was quite large. Would you please discuss what, if any, trends you're seeing within that potential new customer pipeline, whether that be rate of inquiry, size of inquiries, type of products that -- anything you are seeing trend-wise, please.

Well, I think there's some pent-up demand. There were some customers that were teetering on the edge of saying yes a year and a half ago and then decided to wait, because either they had to do so many layoffs that the people who needed to be available to complete an outsourcing project were no longer there, or they decided to wait based upon the fact that their own factories were suffering layoffs and downturns, and they didn't want to increase the pain.

It feels to us, anyway, as if that logjam has kind of been broken, and a lot of people who were considering it and who had tentatively chosen Key Tronic are now going ahead with actually awarding the business to us, which is part of why we are getting a little bit less inclined to tell you how many pieces of business we won in a quarter, because the handshake was maybe a year ago and the first PO finally showed up.

That is helpful.

And you have won in the last five quarters, by our count -- just using the simple math -- for example, this quarter $5 million to $20 million, and we assume one of those three is at $20 million and the other two are at $5 million, so that would get us to $30 million. If we use that same sort of logic over the last five quarters, in essence since you became CEO, Craig, you've won $180 million worth of new business. And as a result, it feels, at least on the outside, as though you are winning new customers at a faster rate. Is that correct? Or is that just a different way of saying what you've just told me? And if it is correct, why -- what's going on out there?

Well, I would have to say we are winning customers at a faster rate, and it's a combination of the word-of-mouth factor that I talked about -- the -- a big, big contributor is the material price quoting ability.

To elaborate on that a little bit, the quote process in the contract manufacturing EMS world is pretty much your marketing process. Other than spending money on webpage and having a sales force out there, none of us in this industry do a lot of marketing. You don't see Key Tronic being advertised in Newsweek.

The quote process is what customers use as the benchmark for picking a supplier. So -- and many times it is not only your price that determines whether you win or lose, it's the speed with which you are able to come up with that price, it's the quality of the questions you ask when you are reviewing the customer's documentation -- because every time we quote a product, we essentially have to create an entire factory within a factory to build that product, so it's the speed and accuracy of the questions you come up with as you figure out how to construct your factory. And it's the quality of the sources that you come up with for the materials that are going to be used, not only the price of the material but the quality of the source.

So I wouldn't say that we are generating the many more -- I wouldn't say significantly more opportunities, but the ones that we are getting, we are getting a much higher hit rate on in terms of getting past the first hurdle, which is to provide a quality quote, based upon the fact that our material prices are no longer so far out of whack compared to where they were eventually going to get to in a quote.

So that has, I think, been the biggest factor in the speed with which we have been able to win new business.

And so the materials quoting has improved that much and is the single biggest factor, if you were to have to name one, to the increased rate of new customer wins?

Yes, the quote process is that you court each other for anywhere from a month to a year. A RFQ is finally generated from the customer to us and 2 to 8 other suppliers. And we used to get bumped out of the first round on most of those quote processes because our materials would be 40% to 50% higher than the winning quote.

The only business we would win would be business that we had gotten to know the prospective customer so well that he was willing to work with us on reducing our materials prices, because he was so convinced of out other -- the strength of our other abilities, that he was willing to invest the time with us to teach us how to buy his parts.

And in the past year and a half we have gone from maybe 40% to 50% high on our materials quotes to 5% to 10% high on our materials quotes, and that's about normal, because when you quote something for the first time versus a customer who has been building it for 10 years, you're always going to be a little bit higher.

So when we would quote 40% to 50% high on a program on materials -- and materials make up about 67% of our total price -- that would just throw us out of the race. So it was a tragedy to do all this work up front, get the customer believing in us enough that he would give us a quote opportunity, and then we would overprice the materials and end up not even getting a second look.

So that has been a huge and dramatic change in our ability to land the opportunities that we've been able to find.

And we've talked about in the past I think, a couple of phone calls, too.

Right, I believe so. That's -- I just don't think I fully appreciated the magnitude of that, nor the importance of it.

Let me shift to another aspect of this same question. Have you had changes in either salespeople or sales process that could account for your success of identifying new prospective business?

We've had a couple of changes in salespeople, but nothing dramatic. And I believe, again, the success goes back to a growing word-of-mouth marketing impact and then the materials pricing, are the main two factors.

All right. And a couple of quarters ago -- I think it was the December quarter call -- we had talked about the new product introduction process and how in the past you folks had lost a number of customers in that new product introduction process.

So my question is -- and in the December quarter call you talked about a number of changes that you had implemented to improve that process. So the question is, what proportion of your new customer wins did you lose before you improved the process? And in the last 12 months, what has been the percentage of customers lost in that new product introduction process?

Looking back -- and this is an estimate from memory -- but looking back we were losing over 50% of our new customers through the NPI process. That's maybe, as memory -- I don't know.

In the last year I don't think we lost any in the NPI process.

Well, congratulations on that change. There is certainly something noteworthy there, given that that's your first full fiscal year as CEO.

It wasn't me. It was the guys that are running the factory and running -- driving engineering. I will take credit for it, if you want, but it was all of us.

Great. Well, thank you all.

So when you have now been going through that new customer startup process and you've won a number of new customers over the last few quarters -- some of those are now ramping -- and this quarter you pointed out that the revenues came in higher than planned as a result of some of those programs ramping faster than planned.

In general -- and this is really more of a qualitative question -- how would you characterize how the startup process, the new product introduction process, is progressing relative to your plan? And here I am thinking from a volume perspective.

Or is the question simply not pertinent because you are really not responsible for how quickly it ramps, it's ultimately how quickly the customer gives it to you and lets you ramp it?

That was too many questions for me to comprehend, so I will just go with the last one, and then you can tell me what else you were looking for, because I kind of lost you there.

In terms of the rate, it is a joint decision by us and our customer. Then as you start into the ramp, it is a period of discovery on both sides. So if we assume that all the customer's documentation is in place and they, for example, have all of the prints of their molds that are used to make plastic parts, and then when we go to transfer those molds from the current supplier to us, we discover that in fact they don't have the prints and the parts don't match the prints that they have of the parts, then the entire process has to slow down as we go back and more or less finish the engineering job on updating all of their documentation to match their parts.

At the same time, if they assume that we know more than we do about how their product is tested, we can do our first production run and discover that the testers they gave us to use at our factory, we don't know how to run, because they are not documented or they don't work the way that everybody thought they worked, and we've got to back up a little bit and figure out how we are going to run these testers.

Another example is on the materials procurement side, and this is where these parts shortages have just really hammered us. If we are taking over an ongoing piece of business and we have to get into queue for parts to supply that business and those parts are now on allocation so they have lead times of 30 to 50 weeks, then our ability to start producing is limited by when we can get our hands on parts.

When they weren't on allocation, you could just redirect the hose, so to speak, from their pipeline of parts coming into their current supplier, be it their own factory or another CM, and just redirect the hose to Key Tronic. But when the pipeline is already half empty, nobody can afford to redirect that hose. It's got to keep going to where the manufacturing is now.

So all those factors -- and there's many more -- but it's a combination of a bunch of things that determines when actually we are going to get the program in our factory ramped up to speed and going. And it's also dependent upon the customer's appetite for risk versus the cost savings we represent and our appetite for risk in terms of if we say we're going to do it on a date and we underestimate it, are we going to have enough guys to throw on the problem to get it done in time?

So it is a pretty complex process. It's not just like -- here, take it, go build it.

All right. Let me switch gears entirely. Would you please remind me what the incremental margin is on new business that you win?

It depends entirely on the project and the customer.

I have thought in the past you mentioned 15% to 20% as kind of a way to think about the incremental margin.

That's a good average, but as Craig mentioned, it could depend upon product mix. We got some customers that we quote a lot tighter. It's bigger volumes and a lot less value add, but it could have a high material cost, in which case we'd quote at a lot thinner margins than on some that requires -- has very little material, but it has a lot of value add -- you can get a pretty high incremental on those.

So you've got some customers that -- as low as probably 10%, and some as high as 30%. So 15% to 20% has generally been a good rule of thumb, but it may not always hold true. But I would say that's probably a good rule, at least to try to think about it.

Okay, thank you. And how much of the $180 million -- [well], that's a minimum -- of a $180 million business that you've won in the last five quarters is still to ramp? That has not been reflected in revenue?

Well, first of all, Bill, before -- I think Craig may be able to answer some of that, but keep in mind, that $180 million that you're quoting, that's given what the customers are telling us. So the customers haven't necessarily always lived up to what their projections are, and we are just giving you based upon our discussions with them. We've had some customers that have still not even kind of got up to the minimum that we thought we were going to get with them yet.

So that number, although it -- I want to make sure that we're not misleading anyone to say that there is $180 million of business at least out there. Well, that still remains to be seen how much of the customers are going to hit -- how they are going to hit their forecast to us.

Then as far as how much still needs to be ramped, we haven't really broken it down to a percentagewise of whether how much of it is in our base already. I think another way -- one way of looking at it is, if you look at compared to last year, we are running at about $15 million to $20 million more revenue per quarter than we were last year, and almost all that growth has come from new business, as Craig mentioned.

So if you say $20 million a quarter, that's $80 million annualized. That's a good rule of thumb, I guess, a pretty good estimate of how much has already been ramped into our numbers and how much is still to go.

Okay, so then that would leave -- just using that really rough sort of number -- $100 million of business to ramp in future quarters. And if we just -- if you allow me to think out loud here with you, if we use the low end of the incremental margin ballpark range, and recognizing the wide range is 10% to 30%, as you mentioned, but maybe use the 15% since that's the low end of kind of a typical ballpark range.

15% of $100 million is $15 million, and if we were to knock off a third of that for taxes, that leaves us a little over $10 million. And then given that you have roughly 10 million shares, that's approximately $1.00 of incremental earnings that are still to ramp, above and beyond the $0.80 run rate that -- earlier in the call, it kind of -- it looks like you are at right now. So without winning any new business, essentially the company is at a point where its future earnings power is roughly $1.80 per share?

I don't think that you can get there from the numbers we've given you, Bill. You're getting ahead of yourself, and that's why we're being careful to say that we don't know what rate it's going to ramp up, and we don't know where it's going to end up.

And you're also taking an assumption that all of the customers, what they've been telling us has (multiple speakers) actually going to come to fruition.

Right. Okay, that's fair.

Let me ask a slightly different question in -- but similar to the general vein, and that is, would you discuss your level of confidence in the business today versus in the past? And you can see how that kind of dovetails to this idea of significant earnings ramp potential from here, at least the way I'm looking at it, but maybe you see things differently. So your view of the confidence in the business, please?

My view of the business is, much improved than it was two, three, four years ago. The base of customers is dramatically broader. The quality of the programs are dramatically more longer-lived than what we were looking at before. The pipeline is much more full than it was in the past and of a higher caliber of opportunity. We are seeing that we have been able to hire and attract more, a bigger pool of people to even interview than we have been in the past, based upon our experience.

So it's all kind of the opposite of in the past where it felt like it was just one bad thing after another piling on. Now it feels like it is one good thing after another piling on in a good way. In every aspect of the business that I look at and think about, it feels much better than it was in the past.

Thank you both for the time, and thank you for letting me take so many questions here today. I appreciate it.

Thank you. And at this time there are no further questions in the queue. I'd like to turn the conference back over to management for closing comments.

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

Ladies and gentlemen, this concludes the Key Tronic fourth quarter and fiscal year end 2010 conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 with an access code of 4325641#.

We thank you for your participation. And you may now disconnect.