Good day, welcome to the third quarter fiscal 2023 Key Tronic Corporation conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brett Larsen. Please go ahead. Thank you. Good afternoon, everyone. I am Brett Larsen, Chief Financial 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 Craig Gates, our President and Chief Executive Officer. 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-K, quarterly 10-Qs, and 8-Ks. Please note, 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 1st, 2023. For the third quarter of fiscal 2023, we reported record quarterly total revenue of $164.6 million, up 19% from $138.4 million in the same period of fiscal 2022. As expected, the significant increase in revenue for the third quarter of fiscal 2023 included approximately $20 million in production for the large program with a leading power equipment company, as well as increased demand from a number of other customers. For the first nine months of fiscal 2023, our total revenue was $425.5 million, up 5% from $405.6 million in the same period of fiscal 2022. For the third quarter of fiscal 2023, our gross margin was 8.7%, and operating margin was 3.1%, up from a gross margin of 8.3% and an operating margin of 2.0% in the same period of fiscal 2022. Our gross margin in the third quarter of fiscal 2023 benefited from increased revenue levels and some stabilization in the labor market. It was adversely impacted by a strengthening of the Mexican peso relative to the US dollar. For the third quarter of fiscal 2023, our net income was $2 million, or $0.18 per share, up 100% from $1 million or $0.09 per share for the same period of fiscal year 2022. Our results for the third quarter of fiscal 2023 include a gain on insurance proceeds of roughly $400,000 or approximately $0.03 per share related to equipment damage in the storm at our Arkansas facility earlier in the year. For the first nine months of fiscal 2023, net income was $4.1 million or $0.38 per share, up 73% from $2.4 million or $0.22 per share for the same period of fiscal 2022. Turning to the balance sheet, we ended the third quarter with total working capital of $199 million and a current ratio of 2.2 - one. Our receivables increased by $14.1 million from a year ago, reflecting the growth in our revenue levels. At the same time, our DSOs were at 79 days, down from 92 days a year ago, which we believe reflects improvement among certain customers with respect to disruptions from COVID-19 and supply chain issues. At the end of the third quarter of fiscal 2023, our inventory decreased by approximately $17.4 million or roughly 10% from the prior period, primarily reflecting increased shipments during the quarter. While the state of the worldwide supply chain still requires that we look out much further in the future than in historical periods, we attempt to carefully balance customer demand and the likelihood of successfully bringing in parts in time for planned production. In coming quarters, we expect to see our inventory levels continue to decrease and inventory turns to continue to improve. Total capital expenditures were about $1.1 million for the third quarter of fiscal 2023. We expect total CapEx for the year to be around $9 million. We've also utilized the insurance proceeds from the storm damage to modernize our operations, which should increase efficiencies in our Arkansas facility. While we're keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production equipment, SMT equipment, and plastic molding capabilities, utilize leasing facilities, as well as make efficiency improvements to prepare for growth and add capacity. Despite disruptions from the global supply chain that have continued to limit production and adversely impact operating efficiencies, we are expecting significant growth in fiscal 2023. For the fourth quarter of fiscal 2023, we expect to report revenue in the range of $150 million-$160 million, and earnings in the range of $0.10-$0.20 per diluted share. While profitability has improved with increasing revenue, higher interest rates on our line of credit and the strong Mexican peso will continue to limit a portion of that expected improvement. In summary, we continue to grow our pipeline of new sales prospects and continue to increase our customer demand to unprecedented levels for Key Tronic. 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. We're pleased with the significant growth in our revenue and earnings in the third quarter of fiscal 2023, driven by our successful ramp of new programs, including major contributions from the large power equipment program. Production for that program is now fully on track. During the third quarter of fiscal 2023, we continue to see the favorable trend of contract manufacturing returning to North America. Currently awarded new business has created backlog that will support over 20% growth in the U.S. sites over the next fiscal year. We have continued to expand our customer base and won new programs involving security equipment, video, pinball machines, mining safety, and productivity products, as well as communication devices. Global logistics problems, the war in Europe, and China-US geopolitical tensions continue to drive OEMs to examine their traditional outsourcing strategies. We believe these customers increasingly realize that they have become overly dependent on their China-based contract manufacturers for not only product, but also for design and logistics services. Over time, the decision to onshore or nearshore production is becoming more widely accepted as a smart long-term strategy. As a result, we see opportunities for continued growth. As we've discussed in prior calls, we built Key Tronic to offer the ideal solution for customers as they move to respond to geopolitical pressures. Our facilities in Mexico represent a campus of 1.1 million square feet in Juarez, most of which is contiguously located in nine facilities acquired over time. Our three US-based manufacturing sites have also benefited greatly from the macro forces driving business back to North America. Moreover, a growing number of potential customers are actively evaluating a migration of their China-based manufacturing to our facilities in Vietnam. Our Shanghai plant has added capability to management, staff, and systems that allow it to serve Chinese customers directly. Shanghai has replaced the business that we moved to Vietnam. Our procurement group in Shanghai, which serves the entire corporation, is important for managing the supply issues that crippled many of our competitors without boots on the ground in China. The combination of our global footprint and our expansive design capabilities is proving to be extremely effective in capturing new business. Many of our large and medium-sized manufacturing program wins are predicated on Key Tronic's deep and broad design services. Once we have completed a design and wrapped it into production, we believe our knowledge of a program's specific design challenges makes that business extremely sticky. We also invested in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection molding, blow, gas assist, multi-shot, as well as PCB assembly, metal forming, painting and coating, complex high volume automated assembly, and the design, construction, and operation of complicated test equipment. This expertise may set us apart from our competitors of similar size. As a result, a customer looking to leave their contract manufacturer will find a one-stop shop in Key Tronic, which is expected to make the transition to our facilities much less risky than cobbling together a group of providers, each limited to a portion of the value chain. We believe global logistics problems, China-US political tensions, and heightened concerns about supply chains will continue to drive the favorable trend of contract manufacturing returning to North America, as well as our expanding Vietnam facilities. The fact that we are continuing to see significant backlog levels in the fourth quarter indicates our growing momentum. Along with the records we are setting for revenue, we see a noteworthy improvement in all metrics associated with business development. For example, over the past year, the number of active quotes with prospective customers has increased significantly. This unprecedented increase in demand for our unique mix of skills, location, and people has powerful implications beyond the obvious revenue growth potential. In particular, we have been able to negotiate more favorable pricing terms and business parameters than in the past, as well as to be much more selective in the new customers we bring on. While this shift in leverage will not manifest in the short term, its effect on our long-term performance should be profound. We move into the fourth quarter with significant backlog levels and a strong pipeline of potential new business. We're seeing improvement in the global supply issues and lower labor turnover, which severely limited our production in prior periods. We're very encouraged by our progress and potential for growth. This concludes the formal portion of our presentation. Brett and I will now be pleased to answer your questions. 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 the signal to reach our equipment. Again, if you would like to ask a question at this time, please press star one. We'll pause for just a moment to allow everyone the opportunity to signal for questions. We will take our first question from Bill Dezellem with Tieton Capital. Please go ahead. Thank you. Relative to the four wins that you had this quarter, what is the size of each of them? Were they existing customers with new programs or new customers? Were any of these for Vietnam? None were for Vietnam. The largest was a new program, actually, with a new division, a different division of a current customer. That was worth $15. Next one was new customer worth about $5. Next one, new customer worth about $3.5, $4. Next one, new customer worth about $3. Then quite a few other smaller ones total up around $1.7 for the total wins in this last quarter. These wins are primarily if they're in that, the $5 million range, I'm presuming these are coming to the, to U.S. locations? Yep. The top one, the $50 million one's going to Juarez. The other four or three plus miscellaneous are going to the U.S. Right. you did say the first one was 15, one five, correct? Correct. Yep. Okay. Thank you. So these that are going to the U.S. locations, are those coming from China, or are those just business that's being picked up around the country from either internal manufacturing or other US manufacturers? Let's see. The biggest one of those U.S. came from China. The other three are people that were doing it in the States. That's, that's helpful. Anything else you'd like to add on any of these? Nope. Shifting to the power equipment company. Talk to us about the future with that relationship. Is this like a one and done sort of deal? Does this go on? Well, how are you thinking about this? The first piece of business will be in a bit of a slowdown from the end of this current quarter through the first quarter of next fiscal year. That will ramp back up to larger than it was this year. Once we complete that season's worth, we have already been awarded two other pieces of off-cycle business that will fill in next year's summer production with other products. It's definitely not a one and done. The relationship has been a success and is going to expand over the coming periods. Congratulations. I presume then that your guidance, revenue guidance being down a bit sequentially, that's really the seasonality that you're referencing with this customer? Yep. If I just heard you correctly, is that next year we won't have the seasonality because of the two additional programs you've won? Yep. Excellent. All right. That's, that's helpful. Would you further dive into one of your opening comments, and it was also in the press release, that you have potential customers that are evaluating the Vietnam facility and moving product from China there. That just follows the trend we've been talking about, is people are trying to find solutions to defocusing so much of their production in China. There are places people are looking that, you know, India, Vietnam, Eastern Europe, Mexico, the United States. It just depends on a customer's given situation on where they're going to land for which location meets their requirements. Does Vietnam, other than its geographic, location and proximity to China, have any meaningful benefit for either larger programs, and so it's really competing with Mexico or smaller programs, so it's really competing with the U.S., or is it entirely a geographic play? Can you fill in a bit more around that? Vietnam is nominally less expensive than China, which puts it nominally less expensive than Mexico by quite a bit. You still have the logistics problems in getting product back to the States or Europe, if that's where your product is going. Workforce, we're finding to be excellent. Government oversight and influence, we're finding to be very good. All in all, Vietnam's been a very positive experience for us and the customers that are there now with us. how big are these customers that are evaluating Vietnam? They have large programs in the $20 million-$50 million-$80 million range. Do you find yourself... Yes. The spirit of this question is your likelihood of winning lots of business. Do you find yourself, as you are, competing for this business and in the evaluation process, making lots of progress working down to the finalist list or are you know, finding some regular hurdles that you need to, that you need to address? How is that developing? The only regular hurdle that we had issues with was COVID, and that shut us down for a while in terms of getting prospective customers in to view the plant. As you look at the way OEMs outsource their products, seems like a lot of outsourcing is done in, as a response to CEO edict. You know, for years, CEO edict was, "Go to China. I don't care what you say. China's best." The CEO edict appears to be, "Get out of China. I'm not sure where you should go. Come tell me where you're gonna go." We have people that are really looking at business, putting business with us, and they're not sure which location they wanna put it in. We've started running, setting up our quotes so it's very easy for us to flip the rates and quote a product out of Mexico, out of the Midwest, and out of Vietnam, and then have a discussion with our customer or prospective customer on the pluses and minuses of each of those those locations and how they map onto whatever that customer's situation is. I don't see. There is no common theme of what we have to overcome in selling Vietnam. It's more a case of that location gathering, steam and acceptance among people who are making the edicts without doing a whole lot of in-depth analysis of the pluses and minuses of the various options. That's helpful, Craig, and I know I've taken up a lot of time, but I would like to ask one more. Relative to other competitors in Vietnam, and I did hear what you just said, that you quote with a price for the U.S., a price for Mexico, and a price for Vietnam, and then talk about the pros and cons. If someone is making a decision that they want to be in Vietnam, are you finding that you all have any special advantage or disadvantage relative to others that are in Vietnam that would be competing on the same quotes? One advantage we have is that we chose the right city. Da Nang is working out very well compared to our other two options. The other advantage we have is that we run our program management out of the States. Most of the customers that are looking to exit China or go to Asia for the first time are comforted by the fact that their program managers will be speaking to them in English on the American time zone. Those two advantages, coupled with the fact that you can get our design services, our production process development, our quality system, you can get all of that in a new location in Vietnam, is a pretty big advantage to somebody who's just starting their first offshore facility or somebody who is headquartered somewhere other than the U.S. Great. Thank you on a, on a fantastic quarter, and it's nice to see all the success of the last or the efforts of the last few years starting to turn into success. Congratulations. Thank you, Bill. We will take our next question from Sheldon Grodsky with Grodsky Associates. Please go ahead. Good afternoon, everybody. The first thing I'm just going to mention is that your stock is actually down in the aftermarket. Do you know of any expectations that people had that were unusually high that would explain that? I mean, it looks like the numbers are pretty good other than the low end of your estimate for the next quarter for earnings. Nope. Don't know what's going on. Okay. Okay. Anyhow, I believe you said, and I hope the naysayers will hear the question. I believe that you said that you're expecting revenue growth over the next year to be roughly 20%. 20% in our domestic locations. In your domestic locations? Correct. Okay. Did you say anything about overall? We never give that type of information out because we are too much affected by things we can't control. Okay. It's 20% in the U.S. Okay. In any case, I keep waiting every quarter for a breakout quarter and did you think this was a breakout quarter for you? Well, in my book, $164 million was pretty broken. Okay. Yeah, I noticed that your interest expenses are growing very rapidly as one would expect in the current environment where we're moving off the 0% interest rates. I assume that until you get to reduce some of your working capital, that will probably continue to be a big number for you. Is that correct? Yep. Our big goal, which we are seeing some nice success with, is driving inventory out. We, like everybody else in our sector, had our inventory balloon during COVID, now we're working hard and effectively to drive that out. Inventory down, accounts receivable up, accounts payable down. It all says it's headed in the right direction. For sure, our government's doing neither us or anybody in business any favors. Say that again, please. I said for sure our government is doing neither us or any of our competitors any favors with their current monetary policy. Okay. Okay, I'll let that be it for my questions. Okay. Thanks, Sheldon. We will go back to Bill Dezellem with Tieton Capital. Please go ahead. Thank you. One of the things that we really haven't addressed, but with the economy is the elephant in the room is the question of recession. What are you seeing from your customers, really, since you have such a broad base, that would indicate that there seems to be a resilience, slowdown, mixed messages? Share, share with as much as you can, please. I saw recently that good old Elon Musk said that he had the most knowledge of anybody in the world about the economy. When I look at our 200 customers, I disagree. I think it's us. Okay. I think your question is very valid. Last quarter, I think I told you that we weren't seeing hardly any signs of a change in the wind. Unfortunately, right now we are beginning to see some signs of the wind changing into a bad direction. We've probably got maybe 5% of our revenue base is giving us push out and reduction signals. At the same time, we've got probably more than that giving us pull in and speed up signals. It's still in the mixed boat, but there's more downturn than what I saw three months ago. Are there any more upturns or are the upturns similar? I'd say the upturns are about the same. Given the supply chain challenges, do you have a sense that some of your customers' built inventory is really safety stock, and that some of the adjustments that you're seeing now is that same group of customers reversing safety stock, or are you sensing it's something different than that? I don't think people were able to build safety stock, I think this mess that's on us now came along too quick for people to get safety stock built before they started seeing a downturn. People were already talking about a downturn before we actually cleared the majority of the supply constraints. A lot of where I see the pressure growing is in the distribution market, the people that buy parts and then turn around and sell them again. They are really being put under a lot of pressure from the manufacturers who basically coerced large volume, long-term forecasts out of people during COVID, and now are holding people to those forecasts and orders. It looks to me like the bulge in the snake is at the distribution end, not in the end, the distribution middle of the chain. We've done some really, really exciting systematic improvements. I talked about last time how MRP works or used to work and how we've flipped ours on its head, and that continues to yield all kinds of really cool results. It was also an interesting quarter because after, in many cases, close to a year of arguing with customers who had committed to buying aged inventory, as long as we were able to go get it for them, we've had as of today, we don't have any large outstanding aged inventory payment that we're arguing on with a customer. That's down from spending probably 50% of my time arguing with high levels within the customer base about the money we were owed for our aged inventory. We were able to get our slowdown before the bulge came through and hit us. Is the implication of your last comment, Craig, that you have reduced inventory further from the end of March? Yep. By roughly how much? A good amount. That's better than a bad amount. Thank you. Let me see if I can get a more precise answer to a balance sheet question. Actually, in all seriousness, is there anything else relative to what you're seeing with the customer base before I jump to the balance sheet? No, I think it's in general, it's gloomier and doomier than it was three months ago. I'm sorry. Go ahead. No, go ahead. I guess I was wondering, should we be interpreting your comments as gloomy and doomy, or just directionally, it's not as positive as it was? I mean, I look at the results, and it doesn't feel gloomy and doomy. I just wanted to make sure that we're interpreting comments and results, and future all appropriately. Well, yeah, I'm glad you asked that question, 'cause I'm not saying gloom and doom for Key Tronic. I'm saying gloom and doom for the overall economy. So far, our new business wins are far outstripping anything I see as recessionary pressures on our revenue. Unless something dramatically falls off a cliff, we're exceedingly optimistic about the next year, even with the gloom and the doom that I'm hearing from the overall market. Even if there is an overall economic slowdown and/or a recession, your view from what you see with your customer base and your new customers is that you will be able to continue to grow revenues on an absolute basis through that pressure. As we view it today and what I know today. Right That answer is yes. If it turns worse, I don't know how bad it's gonna get. Yeah. I totally understand. That's quite helpful. Maybe I'll circle back to questions about Vietnam since winning, you know, one or two of a $20 million or $50 million or $80 million piece of business makes a big difference. Would you anticipate that any of those pieces of business would ramp any at a pace any different than the normal pace of a piece of business coming into Mexico, you know, of meaningful size? I think first comment to make is that we used to say it took between nine months to a year and a half to ramp a new piece of business. We're seeing now that the time from initial contact through to actually beginning to build product has dramatically decreased as people have become more convinced that the right path and the easy path is into locales that we are strong in. That has sped up nicely compared to what it used to be because there's not the five, six months of debate within the customer on, you know, why are we not going to China, because everybody goes to China. That delay is now gone. A lot of people who call us, you know, it used to be, "Yeah, we're gonna run a market basket analysis, and we're gonna have 20 people quote on this. If you have questions, don't bother me because nobody else asks questions." That used to be probably half of the quotes we got. Now, I'd say the majority of what we get is, "My boss says I gotta get out of China. I gotta make a decision. You guys are the only guys I can find that can do X. When can I have a plant tour?" It's completely changed the tenor and the speed of the relationship as it goes from first meeting to first production. not to be overly focused on Vietnam, but literally the. You're- Oh, go ahead. I said too late, but I was joking. Fair enough, and it'll even be worse with this question. Yeah. With the movement of business away from China. Some of that likely ends up in Vietnam, and you have capacity there, so you can ramp quickly. Just coming back to this concept that with an economic slowdown that you could grow through it, that Vietnam would be an important component of that equation then, if we're hearing you right, and putting all the pieces of this together right. I'm not sure I understand why you think Vietnam stands out as an important element. It's one element for sure. Yeah. I think it's because you had mentioned in response to a question that I narrowly focused on Vietnam, that you had $20 million, $50 million, $80 million dollar pieces of business. I know that you have capacity there. That's where my mindset is coming from. I'd love you to stretch my mind, if you would, and go beyond that if you think, you know, you also see that type of business potentially flowing into Mexico at the same time. Yeah. That's why clarity is always a good thing to strive for. We see that size business and more opportunities in Mexico and in the Midwest. We have capacity in Mexico and in the Midwest. All right. To continue down the clarity path, I'll pick a midpoint of $50 million between the 20, 50 and 80. There are $50 million pieces of business that may land in Vietnam, may land in Mexico, may land in the Midwest? Yep. Well, the $50 million won't land in the Midwest 'cause that's too big. Certainly there's one right now that'll be $20. Well, congratulations. I mean, that one piece of business there, will get you a long ways towards your 20% growth in the U.S. operations. Yep. Okay, anything else on that before I, before I do jump to the balance sheet now? Nope. Brett's been sitting here waiting to talk. Go for it. Excellent. Brett, two questions relative to the balance sheet. The other current liabilities dropped pretty meaningfully versus the December quarter. $18.3 million dropped to $12.8 million, and it was, you know, pretty high or much higher a year ago also. The long-term obligations also dropped sequentially. I'm sorry, that one went up sequentially. Can you talk about those changes between those balance sheet accounts, please? Sure. That's predominantly our leasing facilities. Through the new leasing standard, it's required that you put on the balance sheet, specific amounts for the fair value of those leases. The transformation from current to long term is just that we've entered into some new leases and paid some of the old, leases off that were, you know, that were due within that 12-month period. Understood. The long term and other long-term obligations and other current liabilities, those two are interacting with each other. Bottom line, I'm just asking about lease assets and lease liabilities as it turns out. Correct. That is correct. Oh, okay. Well, my apologies for that. I didn't appreciate that was tucked in under the other category. Thank you both, and, again, congratulations on a great quarter and, what the next few quarters might bring for you. Thanks, Bill. Appreciate it. As a reminder, if you would like to ask a question, please press star one and we'll pause for just a moment. There are no further questions at this time. Mr. Gates, I will turn the conference back to you for any additional or closing remarks. Okay. Well, thank you, everybody. Thanks for participating in today's conference call. Brett and I look forward to talking with you again next quarter. This concludes today's call. Thank you for your participation, and you may now disconnect.