Release Date: November 05, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Key Tronic Corp (KTCC, Financial) reported improved operating efficiencies and margins, with gross margin increasing to 10.1% and operating margin to 3.4% in Q1 FY25, compared to 7.2% and 2.2% respectively in the same period of FY24.
- The company successfully reduced inventory by approximately $31 million or 24% year-over-year, aligning inventory levels more closely with current revenue.
- Production in Mexico increased by approximately 10% sequentially from the prior quarter, despite production delays and lower-than-anticipated revenue.
- Key Tronic Corp (KTCC) continues to expand its customer base, winning new programs in manufacturing production equipment, vehicle lighting, and commercial pest control.
- The company is strategically investing in its Vietnam facility, expecting it to play a major role in future growth, with plans to increase capacity and capability.
Negative Points
- Total revenue for Q1 FY25 was $131.6 million, down from $150.1 million in the same period of FY24, impacted by customer-driven design and qualification delays.
- Accounts receivable days sales outstanding (DSOs) increased to 92 days from 88 days a year ago, reflecting reductions in net sales at higher rates than reductions in receivables.
- The company experienced a write-down of approximately $0.8 million in capitalized variances during Q1 FY25, which is expected to continue for another quarter or two.
- Despite improvements, Key Tronic Corp (KTCC) still faces a high level of debt and interest expenses, which are impacting profitability.
- The company anticipates continued wage increases in Mexico, which could affect cost competitiveness if not managed effectively.
Q & A Highlights
Q: What is the size of the three new program wins mentioned in the press release?
A: The first two programs are around $5 million each, and the third is just under $5 million. - Brett Larsen, President, Chief Executive Officer
Q: Can you provide more details on the circumstances of the three delayed programs?
A: The delays impacted revenue by approximately $9 million. The first program resumed production in early October after qualification improvements. The second program, an updated version, resumed last week and is expected to be fully ramped by the third fiscal quarter. The third program, a Nextgen design, is expected to resume in February or March. - Brett Larsen, President, Chief Executive Officer
Q: Why is the second program not fully ramped until next quarter despite restarting this month?
A: The delay is due to longer lead times for new components and the need to ramp up staff and production, especially considering the holiday season. - Brett Larsen, President, Chief Executive Officer
Q: Can you explain the capitalized variances mentioned in your opening remarks?
A: We wrote down capitalized variances by about $800,000 due to higher costed products in inventory. As these products are sold, the variances will come off the balance sheet. This will continue for another quarter or two. - Tony Voorhees, Chief Financial Officer
Q: Why would a Chinese customer choose Key Tronic's Shanghai facility over local competitors?
A: We offer significant technical expertise and experience in building a wide range of products, which appeals to local Chinese OEMs. - Brett Larsen, President, Chief Executive Officer
Q: Why is the revenue guidance for the next quarter flat despite resumed programs?
A: The second quarter typically has lower sales due to holiday closures, reducing production time by about a week and a half. - Brett Larsen, President, Chief Executive Officer
Q: How are you addressing the high level of debt and interest expenses?
A: We are focusing on improving working capital and inventory management. We are also exploring refinancing options to reduce debt and increase liquidity. - Brett Larsen, President, Chief Executive Officer
Q: What is the status of the restructuring in Mexican operations, and has the benefit fully flowed through the P&L?
A: The restructuring is complete, and we are seeing the benefits in reduced wages. However, some higher cost inventory is still on the balance sheet. We will continue to seek efficiencies. - Brett Larsen, President, Chief Executive Officer
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
