Welcome to the Fourth Quarter Fiscal 2024 Keytronic Corporation. [Operator Instructions]. At this time I would like to turn the conference over to Tony Voorhees. Please go ahead, sir.

Good afternoon, everyone. I am Tony Voorhees, Chief Financial Officer of Keytronic. I would like to thank everyone for joining us today on our investor conference call. Joining me here in our Spokane Valley Headquarters is Brett Larsen, 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 that company has filed with the SEC specifically our latest 10k, quarterly 10 Q's and 8-K's. 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. During this call, we will also reference slides that accompany our discussion. The slides can be viewed with the webcast, and the link can be found on our Investor Relations website. In addition, the slides, together with the recorded version of this call, will be available on the investor relations section of our website. We will also discuss certain non-GAAP financial measures on this call, additional information about these non-GAAP measures and reconciliations to the most directly comparable, comparable GAAP measures are provided in today's press release, which is posted to the investor relations section of our website. For the fourth quarter of fiscal year 2024 we reported total revenue of $126.7 million compared to $162.6 million in the same period of fiscal year 2023. For the full year of fiscal 2024 total revenue was $559.4 million compared to $588.1 million for the fiscal year 2023. Also previously disclosed…

Thanks, Tony. Fiscal 2024 got off to a very promising start, though we faced some challenging headwinds. During the first half of the year, our revenue grew by 12% year over year, driven by increased production in our U.S. and Vietnam based facilities. Despite the strong top line growth, our margins and profitability were negatively impacted by increased labor costs, unfavorable foreign currency exchange rates in Mexico and higher interest rates. During the second half of fiscal 2024 we faced major disruptions to our business, including severe winter weather events that took our facilities in Mississippi and Arkansas offline for approximately two weeks in the third quarter, and then the cybersecurity event that interrupted our operations and corporate functions in Mexico and the U.S. during our most recent fourth quarter. Together, these events disrupted production for approximately six weeks during the year. Despite these disruptions, we took the necessary steps to reduce our workforce in Mexico, which is expected to save more than 10 million annually in labor costs. In coming quarters, we expect sales from Mexico based production to recover due to recently one new programs, but we do not anticipate needing to increase our head count in coming periods. Moving into fiscal year 2025 we're very pleased to see overall improvements in our operating efficiencies, as well as reduced inventory levels and other improvements made on the balance sheet. During the year, we continue to expand our customer base, winning new programs involving security equipment, sporting goods, environmental solutions, security products, military, aerospace, industrial control systems, energy management, telecommunications, consumer, audio industrial manufacturing, industrial moving equipment, industrial storage, medical devices and consumer air filtration products. The strong pipeline of potential new business underscores the continued trend towards onshoring in a dual source and a dual sourcing of contract…

[Operator Instructions]. They will take our first question from Bill Dezellem with Titan Capital.

Brett, would you please start by sharing with us what proportion of the $10 million of annual savings, or what, roughly $0.70 cents per year. How much of that will be achieved in fiscal ’25?

Through the fiscal year 2025 most of it, if not all of it, Bill, we're expecting that those cost savings to occur in the year.

And some did fall into the Q4 -- how about just falls into fiscal ’25?

I would say the majority of it fell into our fourth quarter since most of that severance occurred during our third quarter, there was some limited amount but the majority of it was felt in our fourth quarter.

Okay, that is helpful and so that explains why we see revenues down pretty meaningfully, but gross margin increasing completely counter to what we would normally expect.

Absolutely.

Okay. Well, congratulations, that's fantastic. And the restructuring activities, I think that you mentioned on the last conference call that there may be more that need to be done and I wasn't sure if that was all incorporated in this savings, if that additional activity took place in Q4 or if there is additional cost savings that you anticipate that could develop in the remainder of this year.

If so. Bill, I think to that end, I think we're continuing, looking at our operating efficiencies, there is some potential of additional restructuring in fiscal 2025, it's been great to see, even after the reductions in force, there really has not been any concerns, issues, problems, delays in our production. So we're continuing to look, to see is there some additional restructuring that could be done during fiscal ’25. We're really not doing that right out of the gate, just because of the cyber event. We're on all cylinders trying to get through some of our orders backlog, but, but I could foresee possibly some restructuring to occur during the year.

Great. That is helpful. And then I do want to make sure I have you touch on the four new wins this quarter. What is the size of each of those and quite interesting stories might happen with each event?

Yeah, one is within our Arkansas facility. It's a fairly large program for Arkansas, it's predominant electronics. That one is roughly about $15 million win. The other large one was a metals, predominantly metals fabrication, which will go down into our Mexico facility and then the two others were also for Mexico, roughly between $5 million and $10 million each.

And the metal fab is how much?

Sorry. That too is about $15 million.

The two $15 million wins this quarter.

Yes. Good quarter.

Congratulations. That's fantastic. And do you see -- foresee any of these ramping either more or less slowly than the typical wins?

Out of the gate, they all look great. There can be some delays. My expectation is that by this time next year, they'll be fully ramped.

Okay. That's helpful. And then I did want to key in on the medical device win. Sometimes medical devices have special requirements, whether it be clean room, certifications, et cetera, et cetera. Is there anything around that idea to this specific win, and the spirit of this question is to understand if this could be the beginning of a new category for you.

Bill, we've always had some medical production. We're extremely interested in pursuing that industry. This was a good win for us. I don't think it's any more complex than what we build today. We are certified in 2 of our locations to manufacturing of medical devices. This one isn't much more -- as mentioned, isn't any more complex than what we're building today.

Thank you, Brett, and I'll hop in back in queue and congratulations on making it through the cyber incident. So, such a short window.

[Operator Instructions]. And we will go back to Bill Dezellem with Tieton Capital.

Okay. I'm happy to ask more here. So, in the release, one thing that I was surprised to read Brett was that Vietnam is being used for lower production, I would have thought that would have been your lowest cost facility. And therefore, for those who can have the longer lead time that they would -- that you find some much bigger runs potentially coming there. Did I misread what you were trying to communicate? Or if I have some learning I need to do here?

No. That really is our intent of Vietnam is to be our lowest cost facility. I think to your point, they need to have some ability to have increased transportation time. There are a few smaller programs in Vietnam, but longer-term, my expectation is as that grows, those will really be more higher volume, less mix type products that are better suited for our lowest cost site. Did that answer it, Bill?

It did. And then let's jump to the cyber incident for a moment. The $2.3 billion cost, where did that fall within the P&L?

Predominantly in cost of goods. So, I would say 2/3 of it is in cost of goods, 1/3 of it is in G&A. So, the outside advisory firm falls into the general -- the operating expenses, whereas the required wages that we paid to keep workers was captured in cost of goods.

Understood. And then you think that you referenced in the release that you would anticipate that the $15 million of revenues that you believe that you missed out on, that those will be recaptured over the course of fiscal '25. Is that correct? Or should you be able to recapture the vast majority of that here in the first fiscal quarter?

No, it's going to take us more than just a quarter to get caught up. So, granted those specific orders will be made up in the first quarter, but then there's a delay possibly of things that our customer wanted then in the first quarter. So, to get completely caught up on that $15 million of lost orders. It may take us the better part of the year.

Okay. So, where I was hoping to go with that was that $15 million, you add that to what you just did in the quarter, and that puts you already to the low end of your guidance. You have legacy customers that are showing some signs of rebounding. You have new business ramping. It disappeared like there may have been some conservatism built into the numbers. And I suppose to some degree, that still stands a little bit, but maybe not to the full $15 million magnitude as I was thinking.

Yes. That's accurate.

And then one nitpicky question, if I may. There was a restructuring cost reversal that was, if I read it correctly, severance expense reversal of $223,000. Are we reading that right? And what led to that reversal that's not often that we see that?

Sure. No, that is correct. That was a reversal of expected severance expense. So, due to the cyber event and then also to the recovery of some of our legacy customers in Mexico, planned reductions in force of a few of our people did not occur. So, that is actually the recovery to the income statement. So, included in the fourth quarter is that rough $200,000 worth of benefit because we didn't go through severance that was anticipated.

Okay. That's helpful. And then one additional question. So, talking about the legacy customers rebounding. Provide a little more detail and perspective on that. And the spirit of this question, of course, is that if you look in the last couple of weeks, there's been an awful lot of question marks about the economy, at least in the popular press. Would love to get your view of what you're seeing from your customers and what your sense is of their end demand and that full phenomenon. So, as much perspective and color that you can provide, we'll take all of it.

Yes. At a real high level, Bill, we saw some retraction of our legacy customers' forecast. It began to occur late 2023. And then I would say, probably the first 3 or 4 months of this calendar year. We're now seeing some increased demand from many of our customers. We're actually seeing some demand that's coming back from maybe a dip that occurred earlier in the calendar year. I definitely see that our customers are far more -- they have far more concerted focus on those forecasts in making sure that they aren't over inventoried. So, I think there is a little more ebbs and flows. But at a really high level, we're feeling far more confident that there really is some strong demand, some returning demand from those legacy customers in the forecast that we're seeing from them. There are definitely peaks and valleys, but I think for the most part, our anticipation is that we'll get back to 2023 levels in the next 6 months.

And with these lower costs, that's going to increase some pretty meaningful flow to the bottom line.

Absolutely.

Thank you again, and congratulations again. Look forward to seeing that develop.

We'll take our next question from George Melas with MKH Management.

Thank you. Good afternoon, guys. Brett, congratulations on your first call as CEO. And Tony, very nice meeting you on the phone. Just a follow-up on Bill's question regarding the cybersecurity expenses. So, if we take those out from cost of sales, gross margin that was actually well above 9%. And I was looking back at my model in the last 2 quarters where you had a gross margin above 9% was in June 2014 and June 2022. So, basically, over the last 10 years, you've had two quarters over 9%, and here, you are at 9%, including a significant amount of extra cost. So, where did gross margin go from here, Brett?

George, that's -- it's a great question. Our expectation is that we want to continue to keep that gross margin to the 9% to 10% level. It is great to see some significant improvement. As you mentioned, we haven't seen this for upwards of 10 years. The weakened peso definitely helped. But I think as well, the reduction in force that we did was what's critical in getting us back to the profitability that really that we're seeking. Where it goes from here, I'd love to be able to have a crystal ball and be able to understand what the peso is going to do and what are we going to be able to continue to take advantage of as far as operating efficiencies. But I think our goal is to continue to drive that gross margin above 9%, the 9% to 10%. That really is what we will be seeking going forward.

Okay. But I mean, if we -- I'm just trying to do the math, if we take out some of the costs that you related to the cyber security event and the cost of sales. And we're talking about revenue of just $126 million. We see that to be somewhat slightly above. So, it seems like you're well positioned for fiscal '25 and beyond?

Yes. Right now, I would agree, George, it looks like we're well positioned to have a good year with that increased margin. I'm also hoping to be able to include some incentive compensation, which is not in there today. It's not going to change it materially. There will be some additional costs as we become more profitable.

Yes. Yes. Great. Maybe talk a little bit about this incentive call. You had a small reversal in the June quarter. Does that mean that there was basically almost no incentive comps for the entire fiscal year '24?

Yes. So, our stock compensation expense has been a stock appreciation rights. That may change a bit in the future. But yes, there's very limited, very little stock comp that's run through our most recent fiscal year.

Okay. Great. Makes sense. Maybe talking about the SG&A, and usually hovered around $6 million, $6.5 million, is that how you see it in the future? Or how do you think about it?

Well, our SG&A this last quarter did include roughly about $0.5 million of cyber expense. So, we would have been just over that. But again, that doesn't include any incentive compensation, which I'm hoping to be able to pay this year. So, that may grow a little bit. We are seeing across the board to be able to retain good talent. But there have been some labor increases. So, I wouldn't -- that 6.5 seems light to me.

Okay. And then maybe a question -- I guess I'm asking a question about the numbers. What about the interest expense, that seem pretty high this quarter it seems?

Yes. With the most recent amendment with Bank of America, our costing did go up. We'll be anxiously awaiting what the Fed does over the next few months and few quarters. That will step down with the Fed fund grade as soon as changes are made. But we're also actively trying to pay down that debt because it is very costly.

And Brett, you've been at Key Tronic for quite some time for a long time, but there is a change in leadership going on, right, with Craig sort of stepping down. He's still going to get involved. But any particular thoughts about the next year or 2 or sort of certain things that you see. I like just the press release and having the adjusted net income, I think it's very helpful. Any change you think to, any desire you have and that you may want to communicate with us?

No, I appreciate that. I think, George, I think the succession was a plan that was done over a number of years. And I think one of Craig's greatest legacy is the staff that he created. I am not anticipating any big changes in leadership anytime soon. Tony has been well prepped to become probably a better CFO than I ever was. But I think our strategy going forward is going to be far more on profitability, to ensure that -- and that's more on an economic value-add basis of how much capital is required to make that much profit and is it a good fit for Key Tronic. I think that will definitely be our focus going forward. And we're headed in the right direction, but we've got a lot of work still to do.

[Operator Instructions]. And it appears there are no further questions at this time. Mr. Larsen, I will turn the conference back to you for any additional or closing remarks.

Thank you again for participating in today's conference call. Tony and I look forward to speaking to you again next quarter. Thanks.

This concludes today's call. Thank you for your participation. You may now disconnect.