Please stand by. Good day, and welcome to the Q3 Fiscal 2022 Keyt ronic Corporation Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brett Larsen. Please go ahead, sir. Thank you. Good afternoon, everyone. I am Brett Larsen, Chief Financial Officer of Keyt ronic. I would like to thank everyone for joining us today for our investor conference call. Joining me here in the Spokane Valley headquarters is Craig Gates, our President and Chief Executive Officer. 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-Q or 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 our results for the quarter ended April 2nd, 2022. For the third quarter of fiscal 2022, we reported total revenue of $138.4 million, up 3% from $134.6 million in the same period of fiscal year 2021. For the first 9 months of the fiscal year 2022, total revenue was $405.6 million, up 5% from $386.1 million in the same period of fiscal year 2021. Our year-over-year sales have increased and customer demand has even been higher, but production continues to be constrained by global supply chain and transportation issues. In the coming quarters, we expect a ramp of a number of new programs, including the previously announced program with a leading power equipment company in our Mexico facility in the first half of next fiscal year. During the third quarter of fiscal year 2022, our results were again impacted by intermittent parts supplies, factory downtime, and overtime expenses. In addition, our facilities in Shanghai, China, have been closed for government-mandated COVID closures for six weeks since mid-March. However, we expect operations to resume shortly. Additionally, our legal costs related specifically to the SEC's review of last year's whistleblower complaint totaled approximately $0.06 per share during the quarter, and we expect legal costs to potentially continue at a similar pace in coming periods. Despite these headwinds, we slightly improved our margins. For third quarter of fiscal year 2022, our gross margin was 8.3% and operating margin was 2%, up from a gross margin of 8.2% and operating margin of 1.9% in the same period of fiscal year 2021. For the third quarter of fiscal year 2022, net income was $1 million or $0.09 per share, up 16% from $0.9 million or $0.08 per share for the same period of fiscal year 2021. For the first 9 months of fiscal year 2022, net income was $2.4 million or $0.22 per share, compared to $4.2 million or $0.38 per share for the same period of fiscal year 2021. The year-over-year change is predominantly a result of increased legal expenses and higher interest expense. Turning to the balance sheet, we continue to maintain a strong financial position. Despite supply chain and COVID-related production delays in the third quarter of fiscal year 2022 and the continued ramp and transfer of new programs, we managed to lower our inventory by approximately $3 million from the prior quarter. We are carefully balancing customer demand and the likelihood of successfully bringing in parts in time for planned production. The state of the worldwide supply chain now requires that we look out much further in the future than in historical periods. In future quarters, we expect to see our net inventory turns slowly improve to more historical levels. At the end of the third quarter, trade receivables were up about $14.4 million from the prior quarter, reflecting the timing of shipments late in the quarter. Our DSOs also increased to about 92 days, which reflects both timing of shipments during the quarter and some delays in payments from customers who were also impacted by pandemic-related slowdowns and restarts in their respective markets. Overall, our balance sheet had total working capital of $179.8 million and a current ratio of 2.1 to 1, up slightly from the prior quarter. Total capital expenditures were about $4.1 million for the first nine months of fiscal year 2022. We're keeping a careful eye on expenditures during fiscal 2022, and we expect our capital expenditures for the full year to be around $6 million. We plan to continue to invest selectively in our production equipment, SMT equipment, and plastic molding capabilities, as well as make some efficiency improvements in our facilities to prepare for growth and add capacity. Despite growing customer demand and backlog, we expect that the ongoing disruptions from the global supply chain and COVID-19 issues will continue to significantly limit production and adversely impact operating efficiencies, particularly for our China-based facilities. For the fourth quarter of fiscal 2022, we expect to report revenue of approximately $125 million-$135 million and earnings per share of approximately $0.04-$0.10 per diluted share. We're working closely with our customers, key suppliers, and employees to minimize the effects of delays attributable to the continued global pandemic, increased global freight and logistics costs, and a limited availability of key components. While our facilities in the U.S., Mexico, and Vietnam are currently operating, and our China facility is expected to reopen soon, uncertainty still exists as to the possibility of future temporary closures, customer fluctuations in demands and costs, future supply chain disruptions during the rapidly changing COVID-19 environment, and other potential factors that could significantly impact operations in coming periods. In summary, we continue to grow our pipeline of new sales prospects and continue to increase our customer demand to unprecedented levels for Keyt ronic. Despite the fact that supply chain disruptions and the pandemic continued to impact our business during the third quarter and remain risks in future periods, we are encouraged by our prospects for the growth for the coming fiscal year and beyond. The overall financial health of the company appears strong, and we believe that we are increasingly well-positioned to win new EMS programs and to continue to profitably expand our business over the longer term. That's it for me. Craig? Okay, thanks, Brett. While we continue to face the stiff headwinds from worldwide supply chain challenges and pandemic-related shutdowns, we're pleased with the successful ramp of new programs and our expanding customer base in the third quarter of fiscal 2022. During the third quarter, the industry continued to face persistent worldwide shortages in the supply of key components, particularly for electronic parts. These shortages have extended production timing and caused transportation costs to triple. Had it not been for the supply chain issues, we believe burgeoning customer demand would have driven revenue for the third quarter in excess of $160 million. Unfortunately, we do not expect the supply chain disruptions to improve significantly in the short term. We also struggled with increasing labor costs and shortages of production staff at some of our sites as a part of industry-wide labor shortages. At the same time, concerns about global logistics problems, the war in Ukraine, and China-U.S. geopolitical tensions continue to drive heightened supply concerns and the favorable trend of contract manufacturing returning to North America. During the third quarter of fiscal year 2022, we won new programs involving outdoor recreation, RFID, industrial connectivity, and electric mobility products. As you will recall from Q2, we previously announced a significant new program win with one of the world's leading power equipment companies, for which we expect to begin manufacturing in the first quarter of fiscal year 2023, and once fully ramped, could contribute approximately $80 million in annual revenue. We would not have won this many programs without our design capabilities and our multi-region footprint, which is designed to be the ideal solution to our customer supply chain issues. During the third quarter of fiscal 2022, we saw an increase in production across both our U.S.-based and Mexico-based facilities. Moreover, production at our new Vietnam facility continues to grow, and we expect big things from our Da Nang facility in the future. As we discussed on previous calls, the pressures on our customer base to lessen their Asian supply concentration remain very powerful. Demand for North American production continues to grow, with no foreseeable end to tariffs, intensifying political tensions between China and U.S., increasing Asian production costs and time to market, and a weakening U.S. dollar. These factors have driven a significant increase in our business. Keyt ronic has emerged as the ideal answer to over-concentration of Asian supply and for onshoring North America, particularly for those companies with programs in the range of $5 million-$100 million. We believe we provide everything needed to make supply chain diversification easy, less risky, and less costly. Our solution set provides companies with both local sources for low-volume products and low-cost sources close to geographic markets for higher-volume products. We also attract the companies that have been overly concentrated with an Asian source, and hence are more likely to have lost engineering control. We can facilitate the move of production from a competitor to our site, enabling a smooth transfer by providing design and production engineering services to those companies who no longer have that capability. Our vertical integration can lessen the risk, time, and cost involved in a transfer. Moreover, after a decade of developing custom process for a staggering array of products, we can onboard just about any product imaginable. Moving into the fourth quarter of fiscal 2022, significant uncertainty still surrounds the continuing disruptions to the global supply chains for key components and the threat of the pandemic. At the same time, we believe that these challenges will continue to force our customers to weigh carefully the degree to which they concentrate their supply chain on any one region and cede their design control to their outsource partner. The recent macroeconomic events continue to force many companies to more fully recognize the significant impacts an elongated supply chain can have on both cost and availability, the risks of IP appropriation, and the attractiveness of doing business with an outsource partner who can minimize the risk on all these factors. These market trends and our capabilities should continue to power our growth over the long term. This concludes the formal portion of our presentation. Brett and I will now be pleased to answer your questions. Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. We'll take our first question from Bill Dezellem with Tieton Capital. Thank you. Let me start with the four new programs that you referenced that you won. Congratulations on that. What's the size of each of those? 11, five, two, and two. Thank you. Let's talk just a little bit about the quarter. You came in at the high end of the revenue range in spite of Shanghai being locked down for two weeks of the quarter and the high end of the EPS range with $0.06 of SEC costs in there. Can you talk through kind of what happened in the quarter that led to that success, please? Well, for a while there, we thought the supply chain was getting a little better, and the effects of the Ukraine war had impacted the parts that we had almost here or there. We were able to get a little bit better in terms of closer to what our customers wanted and what we had the capability to build. We're at a revenue position that becomes pretty leveraged for our profit. As we start to inch our way up that, things that are good happen to profit. That's the basic understanding. If we can get parts, things will look good, and if we can get a lot of parts, things will look really good. On that note, your Q4 guidance is to be down from the third quarter. Is that due to the lockdowns? Is that due to component availability, including the lockdowns? Is it customer demand is weakening temporarily in this quarter? What's the dynamic here? Customer demand has not weakened. It's parts and lockdowns. Are you seeing new component problems? Or is this a continuation of the same, and so it's really primarily the lockdowns would be the at the margin change, if you will, sequentially? No, it's both. There are new components that are causing problems. There is logistics issues that are causing problems, and it's lockdowns that shut the factory down for a while. Okay. That's helpful. With that in mind, how is it that you're envisioning ramping this new business in the first quarter? June quarter is hampered, but the September quarter, it sounds like you're anticipating a meaningful ramp, and yet I suspect the supply chain issues are not going to alleviate between now and then. What's the dynamic that's allowing that improvement? The supply chain issues are specific to products, and this product happens to have a number of its components coming out of the States, and the rest of the components are all being fabricated by us. We're in better than normal shape today than what we are on a number of other products. Craig, let's kind of work the math here a little bit. If ultimately this could be $80 million, that's $20 million a quarter. How quickly do you see the business potentially ramping to that $20 million a quarter? It sounds like from what you just said, we actually have more confidence that you might actually be able to have the components to ramp that $20 million if and when we do get to that point. That product is going to ramp in the middle to end of Q1 and into Q2, and should go very quickly and should be very strong as it's a somewhat seasonal product. May I infer from that that you're thinking that according to what you know now that one piece of business could be approximately $20 million in the Q2, the December quarter? Well, hope springs eternal, Bill. Understood. If we are starting from a point of roughly $130 million, or so, maybe that number is able to move up a little bit between now and then, we could be looking at a December quarter that is nicely north of $150 million in revenue. It could be. That's why we keep saying in all these discussions that if we could get parts, we'd be at $160 million+. Understood. I'm gonna take this one step further. In your opening remarks, you referenced the operating leverage in the business. With additional revenues, that there's good profitability that comes from that. Is there anything about what we're discussing here relative to the December quarter that would hamper that normal leverage? Don't think so. Again, the world is filled with risk, so I can't tell you for sure what's gonna happen. No, I understand. We've had plenty of unknowns for sure, but I appreciate the perspective and thanks for the time. You bet. Thanks, Bill. Our next question comes from Sheldon Grodsky with Grodsky Associates. Good afternoon, everyone. Let me follow up on the last round of the questions. I know it's a tough hypothetical, but if supply chain issues were at what used to be considered normal levels rather than today's levels, how much level of business do you think you would have done, let's say, in the March quarter? If supply chain issues had been normal, we would have been running $160 million+ all this year. Unfortunately, you've been one of my best sources of information on supply chains, and you've been kind of pessimistic for as long as I remember us talking about supply chains. You hinted that you had a moment in there where things were looking more normal. Do you have any sense? I mean, you sound like you're still fairly pessimistic about clearing these things up. Do you think there's a chance in a year the world could be back to normal or that's being too optimistic? In my mind, there is no way the world will be back to normal in a year. It could be trending in that direction, but there is so much pent-up logistics, factory, and raw materials congestion that we're looking at a long time, more than a year, before this rights itself. Okay. I'll let someone else take the floor. Thank you. Once again, that is star one to ask a question. We'll take our next question from George Melas-Kyriazi with MKH Management. Hi, guys. Hey, George. I have a question on inventory. You guys said in your remarks that you expect inventory turn to start to increase and to sort of increase progressively over a period of time. Can you sort of try to give us a little bit more color on what you expect and what's your inventory situation right now? Right now we have too much. We expect it to get better. Thanks for the insight, Craig. Sorry. The beat behind that is that for the past, probably two years prior to this last quarter, we've been missing our forecast as we went into the quarter by as much as $25 million-$30 million every quarter. By that I mean, we'd start out thinking we were gonna build $160 million, and we'd end up building $125 million. Right. We've done two things. We've been able to make some pretty cool enhancements to our MRP systems and our forecasting systems. We have been able to use those in conjunction with our customers' better understanding of the situation we face. We've been able to work in more of a partnership scenario with our customers so that they understand that Keyt ronic can't and won't go buy 99 parts on the BOM in the hopes that that last 100th part will suddenly become available in the marketplace. A number of our large customers have signed up to step in and purchase those 99 parts if we have indeed bought them in the hopes of freeing up that last part. We probably, you know, I said we miss about $30 million from start to end of the quarter, but as we go through the quarter, there's probably another $30 million that's at risk as we chase around the world trying to find the components. Having our customers understand and support us in the effort to try to make their production needs come to fruition has had a big impact on what our inventory has done and is going to do in the future. Also, we have convinced many of our customers that they're gonna have to look out 1.5 to two years and give us firm commitments so that we can order parts against them. That's been an education process over the last two years. We're getting better delta between beginning of the quarter and the end of the quarter on what we thought we were gonna build versus what we actually built. If the world was in steady state, bad steady state, I would have expected some pretty nice reductions in inventory over the next coming quarters. As the world has entered back into a pretty sorry state that's much worse than it was a quarter ago, I'm still hopeful that those three aspects that I've outlined will continue to operate. Just like every word we said in this call, we don't really know what the hell is gonna happen. Okay. How much inventory now do you hold that's actually been purchased by your customers? I think the number, Brett, was about 50, 40. Yeah. We're in excess of $40 million at this point. Wow. Okay. Those are so sobering numbers. They were certainly sobering when we were looking at them to begin with. Right. On the China situation, the shutdown, the Shanghai plant, can you sort of estimate what's the EPS impact this quarter if the plant were to, you know, be operational during the whole quarter versus what you forecast? We have factored that in to our forecast. It's probably, I don't know, $0.02 or $0.03 better if they had run the whole quarter. Just to follow up on Bill's question on the ramp up of the power equipment customer in the second half of the calendar year. I think that's a customer there from a working capital perspective that's somewhat different because they're paying for more things themselves, but do you expect sort of average corporate profitability on a customer like this? I mean, do you expect like a 8% or 9% gross margin on the customer? I don't know. Maybe I'm being too specific. I'm sorry. Yeah. You're being too specific, and you're forgiven. That's the only answer I get, Craig. Okay, let me try another thing then. Just in terms of gross margin overall, you have the disruption in freight is expensive, labor is more expensive. There's this disruption to production schedule. Do you expect to get back to a 9% gross margin in the next 12-18 months? Yes. Yeah. What needs to happen for you to get back to 9% gross margin? The simple answer is revenue. Okay. Even if you Even if you don't get the revenue. It seems like it's more likely you'll get the revenue, but the one thing that's really impeding the gross margin is it's not so much the leverage it seems, it's the disruption to operation because of the supply chain now. Well, at the current revenue level, if everything was running well and continuously, I don't think we'd have any problem getting up to the 9%. Right. With the current revenue level. If we were to jump up into the 150s or 160s, and things are still continuing to run ugly, we should be able to get up or above the 9%. If things run coyote ugly, I don't know what's gonna happen. These are different gradations. Okay. If you just look at it from a regional perspective, if you look at China, Mexico, U.S., Vietnam, of course, U.S. and Vietnam is the biggest part of the business. But is there some areas of weakness from a profitability perspective? Or is it pretty similar compared to? Actually, it's actually pretty encouraging. The U.S. facilities over the next 12 months will grow by almost 40%. This is the first time we've seen any significant growth with that group of factories since we bought them. That's a really concrete piece of evidence when we talk about people bringing business back to North America and becoming correctly gun-shy about trying to get medium to low volume parts built offshore. That sales process, which used to be a lot of convincing and schmoozing and everything else, has now become much, much easier as people have been nursing their wounds from having gone too far the other direction. That part of the business, which had been profit-challenged in the past, now looks to be very healthy. The Juarez facility, as I said earlier, if we can just keep it at ugly, is looking good. Vietnam is looking good. China is actually looking better than it was in the past as we've been able to land more China business for China for that facility. We're at a point where if we can just get parts, this would all be kind of fun. Unfortunately, we can't get parts. It in no way resembles fun. Okay. Thanks for your hard work, guys. Oh, yeah. Thanks, George. Thanks for being a long-term investor. We appreciate it. We'll take our next question from Bill Dezellem with Tieton Capital. Thank you, and thank you for those comments in the discussion before. That was helpful. Let me start with just an accounting question, if I may. In the long-term assets, there's the other line item, which a year ago was about $1.4 million, but it's been growing. I think last quarter or two quarters ago, it was $8.2 million. In this quarter, it's $11.3 million. Brett, what's behind that number? And is there anything interesting to discuss here? You know, Bill, I think a large portion of that other long-term asset. No, I'd have to look further at the details. If you give me a minute, if you have another question. I can certainly rustle up another question. Thanks for that. I really appreciate that, Brett. Thank you, Brett. I appreciate it. The floor will now be mine. Relative to the current lockdowns in China, Shanghai, et cetera, have you already seen component deliveries be hurt by those lockdowns and have that incorporated into guidance? Or is it all just appropriate anticipation of problems? We have already seen delayed shipments and actually shipments that they're not only delayed, we don't know when we're going to get them. We've tried to factor that in, but every day the lockdown continues and spreads from city to city. We're not sure if we factored enough in or not. Understood. I had assumed that six weeks would be a long enough time it would start to show up, but we, up to this point, have not heard of any other company specifically saying it's impacting them, and it just didn't seem logical to me. Yeah, it's starting. Yep. No, that's fair. I think in response to a prior question, it was referenced that you all have about $40 million of inventory that customers have paid for. Is that included in the $155 million that we see on the balance sheet? Or is that in addition to the $155 million, there's another $40 million that is essentially the customer's inventory and just happened to be held at your location? That $40 million that we are holding of our customers' inventory or customer-paid inventory is netted. If we did not have that $40 million dollar reserve, let's call it, or deposit against that inventory, our inventories would be approaching $200 million. Right. Okay. Hope that's helpful. Sorry to distract you from the other, long-term asset question, Brett. I'll shift to something different now. I'm not gonna be able to get there, Bill. Go ahead. Go ahead. Relative to Vietnam, I think you all had said that you're looking for some good things from Vietnam. What insights can you share? Where is the business coming from? I think I have some ideas what might be the case, but is Vietnam now open to where prospective customers can come tour the factory and make final decisions? What's the viewpoint there? Vietnam is now officially open for customers to tour. People are slowly talking about going. We haven't had anybody go yet. We have, interestingly, a couple of customers who want us to move product, super high volume product out of Juárez to Vietnam, as well as new customers who wanna start in Vietnam. I am almost 99% sure one of our customers will have us building the same product in Juárez and Vietnam. It might be too early, but at what point do you all need to be thinking about expanding the Vietnam factory? We're already thinking about that. There's space to do it. Yep. We're basically teetering on the edge of that decision, and it's all based on what the customer would like us to do. It's essentially, it's a rather simple process. It sounds like if you have the space, it's just a matter of the time that it would take to make the expansion happen. Yep. Great. Then I know in the past you all have talked about expedite charges to get inventory or components. Are your customers desperate enough that they are now paying for expedite charges and you are not absorbing those? Or how is that being incorporated in? Well, that's you can trace that over history, and it's kind of a good insight into what's being faced today by all of us that are trying to build stuff. two years ago, two and half years ago, when this started, when we asked the customer for an expedite fee to buy some parts on the gray market, there would be a you know, a month, two months gnashing of teeth and a lot of recriminations about they were sure Keyt ronic had not ordered the part on time because otherwise the part would be available. Now that we've been through this so many times and we have actually made changes to our system so it not only functions appropriately to order parts and time their delivery, it also is more transparent. If a customer does become convinced that we did a bad job in getting the parts ordered on time, it's much quicker for us to show them what are called waterfalls that go through when we got their forecast, when we placed the POs, what the lead times were when we placed the POs, and prove how we got to where we need to get expedite fees in order to order parts. The only time Keyt ronic would pay for an expedite fee is if we can't prove that we order parts appropriately. In the last two years, we have not paid for any expedite fees. The expenses that we continue to highlight are not in terms of expedite fees. They're in terms of what happens in our factory when we have to shut down, send everybody home for two weeks, and then bring them all back, retrain them again, recover from the people that go find another job, get the new people hired, get them up and running. Two, the other issue is, inflation is going so fast that you can never go to a customer and say, "Your price was X. Now it's X plus 5%, and we expect it's gonna be another 5% in the next six months, even though Joe told us it was transitory. We're gonna charge you X plus 10% so we can get ahead of this." You can never do that. You're always behind in raising your prices to your customers. That is part of this whole scenario in that we've been appropriately successful in explaining to our customers why their prices have to go up. By the time we get that one-month, two-month negotiation done, the prices have already gone up more. That's part of all of this too, that we talk about the disruptions in supply chain. It's also the inflation being driven by these disruptions in supply chain. Bill, I do have an answer. I've got an answer to your long-awaited question. I wish it was more exciting, but what that is is the capitalized portion of essentially a finance lease. It's a capital lease that's financed to help support some of the production equipment that we've bought recently. Got it. Great. Thank you both and good luck making it through this quarter. Yep. Thank you. Thanks, Bill. It appears we have no further questions at this time. I'd like to turn the conference back to Craig Gates for any additional or closing remarks. Okay. Thank you again everyone for participating in today's conference call. Brett and I look forward to speaking to you again next quarter. That does conclude today's conference. We thank you for your participation. You may now disconnect.