Key Tronic Corp (KTCC) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Key Tronic Corporation fourth-quarter and year-end fiscal 2012 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). This conference is being recorded today, August 21, 2012.

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

Good afternoon, everyone. I am Craig Gates, President and Chief Executive Officer of Key Tronic. I would 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 the fourth quarter and year-end for fiscal 2012. It was a great year for Key Tronic, marked by rapid growth and increasing profitability. Our success continued to be driven by our unique combination of world-class engineering and global footprint and by the competitive advantages that results from our vertical integration and expanding production capabilities in Mexico, China, and the US.

As we continue to capture market share and grow faster than many of our competitors, we set a new record for annual revenue of $346.5 million. That is up 36% from the prior year. This growth was powered by an increasingly diverse mix of new customer programs. At the end of fiscal 2012, we generated revenue from 165 separate programs with 48 different customers, up from 119 programs with 33 customers at the end of the prior year.

As our business grew, we overcame many challenges associated with rapid growth, steep program ramps, product mix changes, and the addition of new facilities and people. We focused on optimizing product designs, production processes and supply chains and made changes in our business processes to enable continued profitable growth. As a result, we saw significant increases in our margins and profitability.

During the year, we continued to extend our customer portfolio across a wide range of industries. We won new programs involving industrial, medical, military, educational, irrigation, gaming, automotive, transportation management, consumer electronics, household, and robotics products. While these new programs will take many months to move into production, the outstanding and unique services that we provide our customers during the ramp phase have played a key role in our growth by becoming a powerful differentiator to help us win new programs.

Now I would like to turn the call over to Ron to review our financial performance. Then I'll come back to discuss our strategy going forward. Ron?

Okay. Thanks, Greg.

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 with 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 and the year ended June 30, 2012. For the fourth quarter of fiscal 2012, we reported total revenue of (technical difficulty) $96.7 million. This is up 46% from the $66 million in the same period of fiscal 2011. For the full year of fiscal 2012, total revenue was a record $346.5 million, which is up 36% from the $253.8 million in fiscal 2011. Despite the fact that we have been moving many new programs into production, we have continued to improve our gross margins.

Our gross margin was 9.6% in the fourth quarter of 2012. This is up from 7.6% in the same period of fiscal 2011. For the first quarter of fiscal year 2013, we expect to see our gross margins continue to be around 9% to 10%. Our operating expenses were $4 million in the fourth quarter of fiscal 2012. This is up 20% from the fourth quarter of last fiscal year. But it is up much less than our year-over-year growth in revenue.

Of all the new program startups that fueled our revenue growth have required the addition of new engineers and program managers, we have done a pretty good job of controlling our costs. Our operating margin was 5.4% in the fourth quarter of 2012. This is up from 2.5% in the same period of fiscal 2011. Net income for the fourth quarter of fiscal 2012 was $3.8 million or $0.35 per diluted share. This is up 148% from the $1.5 million or $0.15 per diluted share for the same period of fiscal 2011. For the full year of fiscal 2012, net income was $11.6 million or $1.10 per diluted share. This is up 103% from the $5.7 million or $0.55 per share for fiscal 2011.

Turning to the balance sheet, we continue to maintain our strong financial position as we rapidly expanded our business. Our inventory was up 8% from the previous quarter, which reflects a plan to build up in some safety stock of finished goods as we move some of our production of production lines between facilities in Juarez, Mexico.

Our trade receivables were $60.7 million at the end of the fourth quarter, but our DSOs were still about the same at 52 days which is comparable to recent quarters. Our capital expenditures for the fourth quarter of fiscal 2012 were approximately $1 million, which included the build out of our newest manufacturing facility in Juarez. Our CAPEX was about $4.7 million for fiscal 2012 which is comparable to fiscal year 2011. In fiscal year 2013, we expect CAPEX to remain about the same level.

Moving into the first quarter of fiscal year 2013, we anticipate more of our new customer programs moving into production and gradually ramping up. At the same time, we still face an uncertain global economic environment. In addition, some of our older programs have reached maturity which means they are not growing, but are either at a sustained production level or declining very gradually.

Taking these factors into considerations, we expect revenue in the range of $94 million to $99 million in the first quarter of fiscal 2013. In the first quarter, we also expect our gross margins to remain around 9% to 10%. We expect our operating expenses to continue to increase at a slower rate than our revenue growth in coming periods. Taking these factors into consideration, we expect earnings in the range of $0.32 to $0.39 per share for the first quarter and this expected earnings range assumes an effective tax rate of 30%.

In summary, the financial health of the Company is excellent and we believe Key Tronic is well-positioned to continue to profitably expand its business. That is it for me right now, Craig.

Okay. Thanks, Ron. Moving into fiscal 2013, we believe our fundamental strategy is sound. There are three major competitive advantages driving our continued success.

First, increasing costs in China are forcing localized production -- Mexico for North America, China for Asia. We stand alone in the excellence and breadth of our Mexican operations.

Second, our unique organizational structure, which we have owned over 25 years of experience running offshore operations, brings significant advantages to OEMs who want offshore cost savings but fear IP loss, do not want to manage an offshore relationship, fear of offshore schedule risks and inventory uncertainty and want US-based engineering and prototyping.

And third, our size and responsiveness compared to our degree of vertical integration and engineering capability become even more attractive as the push for localized production intensifies.

With these three competitive advantages powering us, we expect to continue to win market share. While mix changes in our program portfolio and costs associated with ramping up new programs will continue to be a part of our business, we expect our sustained focus on controlling costs, augmenting production processes, and enhancing our capabilities will continue to result in profitable growth and competitive advantage.

We are now the ninth largest US contract manufacturer and expect to be sixth next year. As our growth moves us into the Tier 2 category as an EMS provider, we continue to provide the flexibility of a Tier 3 provider and the capabilities of a Tier 1 provider.

Despite the continued macroeconomic uncertainty, we have strong business momentum and an increasingly diversified customer base. We anticipate more of our new customer programs moving into production and gradually ramping up, and our pipeline of new business opportunities remains robust. Over the longer term, the EMS market is expected to see steady growth and we believe Key Tronic is increasingly well-positioned to continue to capture market share and capitalize on emerging opportunities.

In closing, I want to express my gratitude to our employees for their dedication and hard work during this challenging and rewarding period of our history. I also want to thank our valued customers who continue to honor us with their trust, and our shareholders for your continuing support.

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

(Operator Instructions). Jay Kumar, MidSouth Fund.

Yes. My question is you have been adding a lot of new accounts and what is your -- in a brief sentence or two, what is your secret sauce or hook or that -- what you think is the reason you are adding so many new accounts. You are adding more than anybody that I know of. That's my question. Thank you.

Okay. Secret sauce is what we referred to it as before. There's a number of ingredients in the sauce. The first is that for our size we have a number of unique advantages. So everything I am going to mention in the next couple of sentences has to be placed with the for our size proviso.

So first of all we have a very good, deep and talented engineering design capability that is unique for people in our size. Second, we have got a level of vertical integration that's very unique for our size. The amount of different capabilities we have in Mexico, China, and the States here are very unusual with our plastic molding, our tool manufacturing, our SMT high volume assembly and our ability to deal with products that are very unusual. If you were to wander through our factory after spending some time wandering through a number of our competitors' factories, you would be amazed and shocked by what you see us build. And this is something that happens all of the time when we get customers to our facilities.

Typically, an EMS company is putting PCB components onto a PCB, retesting them and maybe sliding them into a wider gray plastic box. That is where the term box build came from. We use the term box build, but we find it a little bit dismissive because the boxes we build move and have parts inside of them that are shafts, gears, pulleys, stepper motors, hydraulics, pneumatics.

So the things we build are very complex. They are unusual for the EMS world and typically we are the first person or company that our OEM customer had ever outsourced the product to. Not all of the time, but that is typical. So that gets us a lot of opportunities that maybe other EMS companies are bidding on, but when a customer walks through our factory and sees all the crazy kinds of stuff that we can build, compared to what he sees in a regular competitor's factory, that is why we get this strange and wonderful products.

And then finally the fact that we have been running offshore for so long. I started a factory in Juarez back in 1984 as a young pup engineer. We know a lot about running facilities offshore. It is not easy and when customers look at how we do it versus how the rest of our competitors do it, that is a very strong competitive advantage for us.

So that probably exceeded your couple of sentences by quite a bit. But it is a pretty cool secret sauce that we are quite proud of.

Mike Cikos, Sidoti & Company.

Good afternoon. Just a couple of quick questions for you. One housekeeping. Can you give the numbers for how much was borrowed and repaid on the revolver during the fourth quarter and for the full year?

Well, we've got $15 million outstanding at the end of the year. But we borrow and repay every day. So every expense that we have we borrow and then every dollar we collect from our customers we repay. So it is probably equivalent to about $90 million that has been borrowed and repaid during the quarter. And then during the year it is close to what our revenue is. You are going to have borrowings and repayments close to what your turnover is.

Okay, so it is really just a function of the programs that you are working on and your working capital needs?

That's correct.

Okay. With the, I guess, number of programs and customers that you have been able to grab ahold of, is there a specific market that you are having greater success with? Like, is it robotics that you guys are doing well with? Or is it medical or is there one in the titular that you can point at?

No. In fact it is a matter of pride that there is not. Way back about five, six, seven years ago when we were talking to people and they were berating us for the fact that we weren't heavy into the telecom market, we were always a little bit contrary and said that we don't want to be focused on one market. We want to spread our risk.

So when we are talking to customers about markets, we talk about the similarities in the products and not the market. So we talk about if it has got complex plastic parts that require precision molding, if it has got complex printed circuit board assemblies that require high level of test and assembly, and particularly if the product has moving parts that require understanding of mechanics, electronics, tolerances, forces and things besides just melting solder and sticking a part in the solder, those are the types of products that we want to compete for and we have a competitive advantage in and usually win. So that is the product type that we go after.

The customer type that we go after are customers with high morals. Customers who are looking for a long-term relationship. Customers who value not only our price, but also value the responsiveness that we can provide as well as the level of added services that really define a relationship over time. But a lot of times people don't come to understand it until they are on their third or fourth outsourcing experience.

Jumping around, I'm sorry for the movement, but I'm thinking more about the engineers that you guys have taken on this year. Can you comment as far as how many you have hired this year? And if or your expectations for hires over the course of next year?

We have got quite a few interns. I don't know how to count an intern as the hire or maybe hire. But we are over probably over 10 that we have hired. We will probably hire more than that again next year.

Okay. And as far as the guidance we've given, I know you guys had also made mention of some other programs, more mature programs are either going to start the decline or just start coming off line. Can you give us an idea of how long the typical program does run for you guys? Or how many of these programs are going to start winding down now?

As far as the typical program goes, it would be hard to come up with an average off my head. We have some programs that are 14 years old and are still going strong. We have some that are a couple years old that have reached maturity. And we didn't mention any programs actually that we thought were going to be coming offline. We just talked about programs that have hit maturity and are going to either be flat or maybe decline a little bit.

So we don't see programs that are coming offline and we don't see a whole lot of decline. We are more, I guess, really concerned about a mature program matched up with the economics that we are facing today. We are seeing a lot of our customers begin to forecast on a much shorter timeline. Everybody seems to be so concerned about risk that they would rather pay up sides for airfreight and overtime than they would give us the forecast outlook that they used to give us and then have to talk with us about excess inventory.

So even though the demand materializes on these mature programs, we don't have quite the visibility that we did before because people are more and more concerned about what is going to happen with the economy.

And with the shorter timelines and forecast that you are receiving from customers, then, is that starting to smooth out the linearity of the quarter? I know that the last month always seems to be the biggest push. But I mean, what do you see on that front?

Well, if we look at our charts and we do quite a bit of statistical analysis on the shape of the order curve, if we look back over the last three years, we see a consistent improvement in the orders we have at the beginning of the quarter. So for sure, the last four quarters we have seen improvement on what is in our order book at the beginning of the quarter.

We still see a common pattern at the beginning of the quarter. Things look pretty good. Then we see kind of a swoon in the middle of the quarter and then things pick up at the end of the quarter. Now I don't know if that is just because God likes to make us nervous or what the cause is of that, but that has gotten to be better understood as we have been doing all of the stats on it. And as I said, the upfront orders have been looking higher as a percentage of our projection for the quarter. So we have been consistently less nervous over the last four or five quarters.

And then last question before I jump back into the queue. Wanted to make sure I didn't miss anything. Typically in the last couple of press releases there's been a statement saying, hey, we won three or four new customers. Programs are going to run anywhere between $5 million and $15 million. Is there anything like that that we should know about?

We are in about that same range again. We have been winning programs. I think we won four or five. What was the number? You remember?

During the quarter?

Yes.

About the same level. I guess three or four.

Three or four, between $5 million and $20 million.

All right. Terrific. Thank you.

(Operator Instructions). Bill Dezellem, Tieton Capital Management.

First of all, I want to circle back to comments or, Craig, your reference to the first questioner's question where you prefaced everything by saying for your size. And would you share with us why that is a relevant preference to all of your comments?

Sure. You can find somebody that's a competitor of ours, so to speak, that does $4 billion or $5 billion per year in revenue who has the kind of advantages that I talked about. But they are $4 billion or $5 billion of revenue and if you are one of Key Tronic's targeted customers, you are probably looking to place a program between $5 million and $80 million. So if you try to get this $4 billion or $5 billion competitor of ours to answer the phone because you need him to do plastic molding, tool design, you need some mechanical design, you need some test equipment design and you need to have somebody figure out how to build your machine that has pneumatics, hydraulics and stepper motors in it, the only guys you can think of to call won't answer your call because you are too small to interest them.

So Key Tronic is about or probably the only person in our size range that can offer a customer of that size the advantages that we offer.

That's helpful. Thank you. And then, relative to the four new programs that you referenced in the release -- robotic, automotive, industrial, and gaming products -- is that in fact Ford new programs? Or did you happen to have more than one new program and in one of those four categories?

No. That was four distinct programs.

And did I hear correctly in response to a prior questioner, $5 million to $20 million is the range of those four programs?

Yes. That is correct.

And which ones -- which of those four are from existing customers and which are from new customers?

One is from existing and three are from new.

And I guess I am curious how on your side of the discussion, you view the -- an existing customer versus a new customer? Because clearly if you are getting new programs from an existing customer that implies that you have done something well for them in their mind and you are gaining further penetration and market share with that customer and yet new programs, clearly, that's also positive. Do you distinguish between them and what remarks would you have for us on the outside about that?

Well, it is kind of like you ask me which I prefer more, T-bone steak or butterscotch shake. I like them both.

All right. Thank you.

Let me shift then to the 165 programs that you referenced that you have that are revenue-producing today. How many of those are not fully ramped? And the sequel to that question is if they were all fully ramped what would that equate to in terms of a quarterly revenue run rate?

I don't think I can answer that off the top of my head. The number has gotten too big.

And is that a question that we could take off-line or is the level of complication behind it just not --?

It's one of those things that if I sit there and try and answer it with the level of quality I like to put in an answer, I would have to make so many assumptions and provisos and different carveouts that I don't think the number that I finally gave you would be any good.

All right. That's helpful. And then I have got a somewhat of a bigger picture qualitative question I would like to get your feedback on. Your revenues grew very, very quickly, basically sprinted from the mid-$60 million per quarter up to the mid-$90 million per quarter. And now it appears as though you are back on what I will call a methodical, steady pace of growth rather than just a -- maybe more of a marathon pace rather than the sprint sort of pace that you had been on.

Do you foresee as you look out to any of the -- of the many other programs that have not fully ramped or that have not even started ramping, that you see additional periods of revenue blast or pop? Or do you believe the Company has to some degree matured to a point that it is more now that steady marathon pace?

Well, what we said was that we are going to grow faster than the market. And that is all we are willing to commit to the shareholders. If you had asked me the same question two years ago before the sprint occurred, what I saw been is no different than what I see today in terms of when we say we have won a new customer or a new program in the $5 million to $20 million range, some of those if you were to believe what the customer told us could be $40 million, $50 million, $60 million.

But we have been disappointed so many times that we don't claim that number because we will believe it when we see it. But two years ago when we were looking ahead and saw what we saw then, if I try to compare that to what I see today, programs we have won, customers we have, projections for programs, it looks about the same. But are we willing to commit to you and shareholders that we are going to have another sprint? I don't think so.

So the interesting challenge that I am curious how you address is it almost seems as though you need to plan for the marathon pace, but be ready to sprint at any moment. Is that fair or how do you balance the realities that you just described?

That is a great question. We have been working here for the past year on what we call the $1 billion plan because we can't afford another sprint under the highly stressed conditions we had in the last sprint. So if we want to stick with a sports analogy, even though we may not have to be ready to run the marathon, or I mean run the sprint, we are doing ladders to make sure that we are going to not pull a muscle if we have to.

So we are working on the business processes that are on place so that if we do ring the bell and we get another 100% growth, we will be able to do it without killing ourselves in terms of the cost required to get the programs in here or the systems required to control the program once they are here, or the hiring and training practices that would be required to grow that fast. So we are trying to get ready for it. We are trying to be prepared for it. Because it's possible it may happen.

But at the same time as you can see from our profit margins, we are not spending a ton of money betting on it and forcing ourselves into a corner if it doesn't happen at all quote unquote that we do is beat the market.

So if I am hearing you correct, that if you were to end up in another situation where you needed to sprint and you did have some big revenue programs come on all at once, as you did here in the past, you believe that your net income results would not be negatively affected in the same way that they were as you're going through that new product introduction and ramp phase.

We believe that. Whether or not we would be right or not, as he knows. But we certainly did a lot of work to get ourselves to believe that. And it hasn't been just looking in the mirror and say, by golly, we are going to be okay. We have actually made a lot of changes.

Great. Well, that's very helpful and best of luck having to actually address that situation and figure out whether what you see in the mirror is correct now.

Thank you.

Mike Cikos, Sidoti & Company.

Just wanted to touch up on one other thing. Given your size now, and I understand that the growth we're seeing it is tremendous, but are you looking to layer in acquisitions on top of your current growth strategy? And if so, can you comment on whether or not you are looking for opportunities currently in the market?

We have always had our eye towards an acquisition. We want to -- if possible, the only way we are going to do it, I should say, is if we can find somebody that we can help quite a bit. So we are going to look for a target who has customers that we are interested in and who either has a problem with where their factories are, or has a problem with how their factories are being run, or has a problem with the engineering services that they can bring to bear. But something that we can add value to and not just try to make the thing accretive by laying off the layer of management.

And can you provide some more clarification than on what kind of size or range or how is it you would evaluate those candidates aside from the value adds or the proposition that you can throw in the mix?

Well, I don't think we are going to buy anybody bigger than ourselves. And I don't think it would be worth the trouble to buy anybody much smaller than $30 million or $40 million. So somewhere in between there is probably where we would be looking for a target.

All right. Thank you very much.

(Operator Instructions). Bill Dezellem, Tieton Capital Management.

Thank you. I wanted to circle back to the new programs real quickly here. And specifically those that you have no revenue from. And I hesitate to ask this question because I sense that in your business some of the customers can be flaky and award business but they never actually do anything with the business. But if you have 165 programs that are revenue-producing today, how many programs have you won but are not revenue-producing? Or is the question even relevant given how flaky some customers -- at least how I perceive some customers can be.

Well, let me take a little bit of a liberty with your question and change it into one that I think I can answer and will make sense.

Always helpful when someone asks a better question and then will answer it too.

As you know, we meet every morning with the whole management team to review the operations. And on the whiteboard in there -- I should say on our smart whiteboard in the conference room, we have 13 customers or programs that are on the wall that are either very, very much in their infancy or at zero that we are focusing on driving through to the -- our goal of what that program or customer will be worth to us over the next year. So these are all programs that have been won just recently and this process is something we just implemented a couple of months ago because there are starting to be too many of them that we are losing track of each one and there it was.

So these new customers/programs have management team executive sponsors assigned to them and we are reviewing them on a weekly basis to make sure that we are doing what we can do to help the customer bring the program into our factories as quickly as possible. Because what we find is that, almost without exception, our customers have good intentions when they award us a program and give us a number. But in many cases the transfers slow down by some item that isn't necessarily our responsibility to help, but if we can help without a lot of cost and bring ourselves some more revenue a quarter or two earlier, we are happy to do it. On other cases, we are screwing up because we don't understand that a customer is waiting for something or thinks we need to do something. And so, looking at them with this high level of focus is helping keep them all on track. But the number you are working for, I think, is 13.

And how does that number compare to say one, two, and three years in the past?

It is quite a bit bigger.

Thank you again.

(Operator Instructions). I am showing no further questions at this time. I would like to turn the call back to management for any closing remarks.

Okay. Well, we thank you 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 does conclude today's conference call. If you would like to listen to a replay of today's conference call please dial 1-800-406-7325 or 303-590-3030 and enter access code 455-2865. Thank you and have a great day.