Key Tronic Corp (KTCC) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Key Tronic Corporation second-quarter fiscal 2014 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, Tuesday, January 28 of 2014. And I would now like to turn the conference over to Mr. Craig Gates. Please go ahead, sir.

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. Joining me here in our Spokane Valley headquarters is Ron Klawitter, our Chief Financial Officer. Today, we released our results for the second quarter of fiscal 2014 and our results were in line with our previous guidance.

During the second quarter and moving into the third quarter of fiscal 2014, many of our new programs continue to ramp up despite greater-than-anticipated reductions in orders from some of our large long-standing customers. While recent quarters have been challenging, we currently expect to see sequential growth either during the fourth quarter of fiscal 2014 or the first quarter of fiscal 2015. By then, we anticipate that growing revenue from several new customers should offset and then exceed those revenue reductions in recent periods by some of our large customers.

At the end of the second quarter of fiscal 2014, we were generating revenue from 190 separate programs and had 57 distinct customers, up from 169 programs and 52 customers a year ago. We expect the increase in the number of revenue-generating programs and customers to reduce our revenue concentration. During the fourth quarter of the previous fiscal year, our largest customer contributed around 23% of our total revenue and our top three customers contributed around 61% of our total revenue. By the fourth quarter of fiscal 2014, we expect our largest customer to be contributing around 17% of our total revenue and our top three customers to be contributing around 47% of total revenue. We see this trend as a very encouraging sign that we are building a much more stable foundation for our future growth.

During the second quarter, we also continued to see a robust pipeline of potential new business and have further diversified our future revenue base by winning new customer programs involving consumer dental hygiene products and consumer home products. Our success in winning new business continued to be driven by our unique combination of world-class engineering and global footprint and by the competitive advantages that result from our vertical integration and expanding production capabilities in Mexico and China.

Furthermore, our continued integration of sovereign manufacturing into our operations is allowing us to begin rapidly expanding our sheet metal fabrication business across our customer base. We are currently investing in the expansion of our new sheet metal fabrication business to capitalize on a growing number of opportunities related to this capability. Now, I would like to turn the call over to Ron to review our financial performance and I will come back to discuss our strategy as we move into the second half of fiscal 2014. 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 for 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.

For the quarter ended December 28, 2013, we reported total revenue of $78.3 million, which is comparable to the previous quarter, but down from $94.6 million in the same period of fiscal 2013. For the first six months of fiscal 2014, total revenue was $156.2 million compared to $192.1 million in the same period of fiscal 2013. As anticipated, the decline reflects the decrease in orders from certain large, long-standing customers in recent periods.

Despite the reduction in revenue levels and the fact that we have been moving many new programs into production, we have continued to maintain a strong gross margin. Our gross margin was approximately 9% in the second quarter of 2014, up slightly from the previous quarter and in line with our long-term target of 9%. Our total operating expenses were $4.6 million in the second quarter of fiscal 2014. This is up 10% from the second quarter of 2013, reflecting our expanding operations and preparations for growth that have been delayed by a quarter or two.

Our operating margin was 3% in the second quarter of 2014. This is down from 6% in the second quarter of fiscal 2013. This decline primarily reflects our lower revenue levels. Despite maintaining reasonably good operating efficiencies, our lower revenue did have an impact on our bottom line in the second quarter. Net income for the second quarter of fiscal 2014 was $3.1 million or $0.28 per diluted share compared to $3.6 million or $0.33 per share in the same period of fiscal 2013. The results for the second quarter of 2014 include a one-time tax benefit of approximately $1.5 million or $0.13 per share due to the changes in Mexico's tax laws, which were enacted in December 2013. For the first six months of fiscal 2014, net income was $4.8 million or $0.44 per share compared to $7.3 million or $0.67 per share for the same period of fiscal 2013.

Turning to the balance sheet, we have continued to maintain our strong financial position. Our inventory was up 3% from the previous quarter, which reflects our preparations for previously anticipated growth in the third quarter, which we now expect to occur in the fourth quarter over the first quarter of fiscal 2015. Over the longer term, we expect our inventory levels to come back into line with our revenue levels and our cash position to increase.

We continue to maintain a zero balance in our bank line of credit and our cash position at the end of the second quarter was $1.4 million. This is down from $2 million at the end of the previous quarter. The decrease mainly reflects capital investments in our new sheet metal production facility in Juarez.

Our trade receivables were $51.4 million at the end of the second quarter and our DSOs were about 53 days, up slightly from recent quarters, reflecting the timing of shipments during the quarter. Our capital expenditures for the second quarter of fiscal 2014 were approximately $1.5 million reflecting our investment in expanding our new sheet metal fabrication capabilities. We expect our CapEx to be about $6 million for the full fiscal year.

Moving into the third quarter of fiscal 2014, we anticipate more of our new customer programs moving into production and gradually ramping up, partially offsetting the continued reductions in production levels by some of our long-standing large customers in recent quarters. Taking these factors into consideration, we anticipate that third-quarter revenue for fiscal 2014 will be in the range of $73 million to $78 million. In the third quarter, we expect our gross margin to remain around 9%. We also expect our operating expenses to remain relatively flat in the coming periods. Taking these factors into consideration, we expect earnings in the range of $0.13 to $0.18 per share in the third quarter. This expected earnings range assumes an effective tax rate of 30%(sic-see press release "32%").

In summary, we expect our third-quarter results to be roughly comparable to Q2, excluding the one-time tax benefit. As our new customer programs continue to ramp up, we expect to see stronger sequential growth during the fourth quarter or the first quarter of fiscal 2015. Overall, the financial health of the Company is excellent. We believe we are well-positioned to continue to profitably expand our business over the longer term. All right, Craig, that's it for me.

Okay, thanks, Ron. While the slowdown by some large customers in recent quarters has masked production ramps of several new customers, we continue to believe our fundamental strategy remains sound. As we have discussed before, we have three long-term major competitive advantages. First, increasing costs in China are driving demand for more localized production, Mexico for North American end-users and China for Asian end-users. Among EMS providers, we stand alone in the excellence and breadth of our Mexican operations. As more previously outsourced manufacturing business moves back from China, we stand to continue to benefit.

Second, our unique organizational structure, which we have honed over years of experience in running offshore operations, brings significant advantages to OEMs. Our growing portfolio of customers increasingly want offshore cost savings. Yet they fear IP loss, fear offshore schedule risk and inventory uncertainty, do not want to manage an offshore relationship and want US-based engineering and prototyping. While we will sometimes be competing against our customers' in-house factories, we believe that beyond the level of cost and service we can provide from our Mexican facilities we offer an exceptional level of experience with a process of competing with an in-house model.

And third, our size and responsiveness compared to our degree of vertical integration and engineering capabilities become even more attractive as the push for localized production intensifies. To this end, we are investing in the expansion of our metal fabrication capabilities in combination with our plastic molding PCB assembly, fleet product assembly, design engineering and test engineering services. This investment reflects our continued strategic focus on providing all EMS services available from a much larger company while still bringing the flexibility and high customer service levels that our clients expect from us.

While periodic fluctuations in large customer demand, mix changes in our program portfolio and costs associated with ramping up new programs will continue to be a part of our business, we believe our fundamental strategy remains sound and our sustained focus on controlling cost, augmenting production processes and enhancing our capabilities with continued results and profitable growth and competitive advantage. We see 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 marketshare and capitalize on emerging opportunities. This concludes the formal portion of our presentation. Ron and I will now be pleased to answer any questions you have.

(Operator Instructions). Anya Shelekhin, Sidoti & Co.

Good afternoon and thanks for taking my question. So first of all, the two new program wins. Were they related to the sheet metal fabrication business in any way?

The larger of the two relies in part on the sheet metal business, yes.

Okay. And are there any new opportunities in the pipeline that you are exploring that are related to that? Could you provide some more color on that?

That are related to the sheet metal capabilities?

Yes.

There's around $40 million to $50 million worth of business that we can identify today that would not have been available for us to even bid on had we not had our sheet metal capabilities.

Okay. And finally, the Asia to North America trend that's been going on in the EMS industry, what is the possibility of increased competition there? I'm sure you've seen in the news Foxconn is looking to build a factory in the US. Have you seen other competitors doing the same? Is that a risk?

Well, Foxconn has already had a factory in Juarez about three miles from ours for about five years now. I don't want to dog test our competitors, but they've certainly had their challenges of bringing that factory up and running it. And again, the point that's really selling it there is that Foxconn is not really interested in any kind of an account that's under a couple hundred million dollars. They might say that they are, but history has shown that they are not.

So our sweet spot customer, which is somebody with $5 million to $100 million of business, won't get the time of day from somebody like a Foxconn. So what we see is that our competitors that are in our size range and match up with the business at our sweet spot don't really have the wherewithal to recreate what we spent 20 years creating in Mexico.

So yes, somebody like Flextronics who has already got something in Mexico, somebody like Foxconn who has already got something in Mexico, those people are beginning to cover their bets by focusing on Mexico, but we don't really compete with them on a day in day out basis. We compete with the next tier down, and those folks, even if they wanted to double or cover their bets, are having a rough time with it. There's a couple of companies in Tier 2 that have tried to go to Mexico over the past three or four years and have failed, have actually given up and closed the shop. So we don't fear that competitive realization that China has become unattractive as it's now official because the front page of The Economist said that this morning. But we don't fear the competition as a result of that.

Great, that's all from me.

Matt Dhane, Titan Capital Management.

Hi, guys. Hey, I was curious. The two new customer wins this quarter, what is the size range for those?

So you're standing in for Bill on that question.

I am.

Oh, good. The one was about three, the other one was somewhere around 20.

Okay, great. Has your confidence in the ultimate ramp of these significant new customers that you expect to ramp in Q4 to Q1, has that -- has the confidence in the ultimate ramp, has that changed either favorably or unfavorably?

I guess I would say it stayed about the same. The timing of it is always a mystery to us and I guess our confidence has been shaken a bit in the long-term outlook or I shouldn't say that, in our customer's ability to forecast their long-term outlook, the big guys that we currently got in our catalog. So it's less of a dramatic slowdown or delay in ramping new customers that has caused this flatness for the next quarter and a half or so and more of a surprise lack of meeting the forecast from a couple of our big guys.

Okay, that's helpful. Thank you.

(Operator Instructions). Jeff Mash, Morgan Stanley.

Hi, guys. You kind of started to touch on it, but basically the question is why are you losing orders from the prior long-standing customers?

We aren't losing any business with them; their demand has dropped. I guess to be perfectly clear, we have lost no programs; we've lost no business; we've lost no upcoming programs. It's just that their demand has slipped.

I guess can you comment on that further? It's dropped off enough that it has hit earnings pretty good. Can you expound on that?

Okay. I can't mention our customers by name, but, for example, we had a customer a year ago this time that was running over $30 million a quarter and today, they are running about $13 million.

(multiple speakers) function of the economy just slowing way down and the core business shrinking?

In their case, it was a function of their market becoming saturated, them failing to recognize it and then building inventory too long before they realized they had too much.

Okay.

There's another large customer that's off probably 40% compared to a year ago that was in our top three, and that customer's business is down due directly to a recognized marketwide decrease in demand in their market space.

Okay.

Thank you. Gentlemen, I'm showing no additional questions in the queue at this time. Please continue with any further remarks you may have.

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

Thank you. Ladies and gentlemen, this concludes the Key Tronic Corporation second-quarter fiscal 2014 conference call. If you would like to listen to a replay of today's conference, you can do so by dialing 303-590-3030 or 1-800-406-7325 and entering the access code of 4660975 followed by the pound sign. We thank you for your participation today and you may now disconnect.