KEY TRONIC CORP Q1 FY2025 earnings call

• Workforce reduction in Mexico, trimming of non-profitable programs, and efforts to reduce working capital are starting to pay off. - Weakening Mexican peso strengthened margins. - Inventory reduced and now more in line with revenue levels. - Expanded customer base with new programs in manufacturing production equipment, vehicle lighting, and commercial pest control. - Onshoring and dual sourcing trend in contract manufacturing due to global logistics and geopolitical tensions. - Rightsized Mexico operations due to sustained wage increases. - Vietnam facility expansion planned with significant capital expenditures. - China production remains profitable and is winning new programs. - Design capabilities key to capturing new business, with investment in design engineers and vertical integration.

For the first quarter of fiscal 2025, total revenue was $131.6 million compared to $150.1 million in the same period of fiscal 2024. Production in Mexico facilities increased by approximately 10% sequentially from the prior quarter. Gross margin was 10.1% and operating margins were 3.4% in Q1 FY25, up from 7.2% and 22.2% respectively in Q1 FY24. Inventory was reduced by approximately $31 million or 24% from a year ago. Total liabilities were reduced by a combined amount of $29.7 million or 11% from a year ago. Current ratio was 2.6:1 compared to 2.4:1 from a year ago. Accounts receivable DSOs were at 92 days compared to 88 days a year ago.

• Second quarter FY25 revenue expected in the range of $130 million to $140 million. - Net income guidance for FY25 in the range of $0.05 to $0.15 per diluted share. - Expect growth in U.S. and Vietnam production, strong pipeline of potential new business, and focus on improving the balance sheet.

• Customer-driven design and qualification delays impacted Q1 revenue by ~$9 million. - Production delays and materials lead times affecting program ramping. - Seasonal demand and design modifications causing delays in some programs. - High interest expense impacting profitability. - Geopolitical tensions and global logistics issues affecting contract manufacturing strategies. - Continued wage increases in Mexico posing cost competitiveness challenges.

Q: What is the size of the three wins mentioned?

A: First two are around $5 million and the third is just under.

Q: Why is the second program not fully ramped until next quarter?

A: Due to longer lead times for materials, changes in components, and ramping staff/production back up including holiday periods.

Q: What are the dynamics behind the long delay for the program ramping until February or March?

A: Seasonal demand for the product, customer reviewing and modifying the design which doesn't hurt their demand cycle.

Q: Did the capitalized variance reduce gross margin?

A: Yes, it reduced gross margin by about $800,000 for the quarter.

Q: Are the Mexican operations restructuring activities complete?

A: No, still monitoring for more efficiencies, but wage reductions from earlier cuts are seen in P&L.

Q: How does return on capital factor into decision-making?

A: Each program is scrutinized based on return on invested capital, with trimming of programs and filtering new quotes based on this metric.