Good day, and welcome to the Key Tronic Q2 Fiscal Year ‘25 Investor Call. Today's conference is being recorded. After the presentation, we will begin the question-and-answer period. At this time, I would like to turn the conference over to Tony Voorhees.

Good afternoon, everyone. I am Tony Voorhees, 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 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 the company has filed with the SEC, specifically 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. During this call, we will also reference slides that accompany our discussion. These 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 GAAP measures are provided in today's press release, which is posted to the investor relations section of our website. For the second quarter of fiscal year 2025, we reported total revenue of $113.9 million compared to $147.8 million in the same period of fiscal year 2024. The lower-than-anticipated revenue and earnings for the second quarter of fiscal year 2025 are primarily due to the impact from unexpected shortages from specific components managed…

Thanks, Tony. While we're disappointed with the unexpected decline in revenue in the second quarter of fiscal 2025, we expect our revenue and earnings to recover in the third quarter of fiscal year 2025 as strategic initiatives undertaken in previous quarters come to fruition. We're actively streamlining our international and domestic operations with further headcount reductions to enhance efficiency building on similar actions a year ago. We're also pleased to see our inventory levels being more in line with current revenue levels and expect that these strategic changes will improve our overall profitability. Moreover, we're significantly increasing our production capacity in Arkansas and Vietnam in order to continue to benefit from the growing customer demand for onshoring their contract manufacturing, and is also expected to help mitigate the adverse impact and uncertainties surrounding the recently announced potential tariffs on goods manufactured in China and Mexico. During the second quarter, we continue to win new programs involving aerospace systems and energy resiliency technology, which was recently announced. The program is expected to begin manufacturing in the second half of 2025. Once fully ramped, we believe its annual revenue could exceed $60 million. This important new strategic relationship represents an expansion of our customer base, and we expect it will contribute to profitable long-term growth. Our strong pipeline of potential new business underscores the continued trend towards onshoring and dual sourcing of contract manufacturing. We expect that global logistics problems, China-US geopolitical tensions, and the recent threat of tariffs on Mexico and China will continue to drive OEMs to reexamine their traditional outsource 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 logistic services. Over time, the decision to onshore production is becoming more…

[Operator Instructions]. Your first question comes from the line of Bill Dezellem with Titan Capital.

Thank you. Brett, may I please start with, kind of my normal first question with these two wins? What's the size of I guess it would be one that you have not talked about in detail and the timing for its production ramping.

Sure, yeah. The aerospace opportunity is going to start out at a $5 million program Bill, but there is potential for that to grow over time. The other is, that that is expected to begin ramping in the latter half of this calendar year. So probably the September-October timeframe. The second one, of course, we shared the energy resiliency technology. Our plans are still to have that begin ramping as well in the latter half of this calendar year.

That's helpful. And then you referenced both in your pre-announcement and today, the component shortages. I guess I haven't heard about components being short any longer. Can you talk about how component shortages actually, or a component shortage has taken place and the how or why that that is an issue now?

You bet. We intended to and we attempted to try to delineate that by saying it was a specific set of components. I don't see any real component shortages across our market. But this was a real specific set that unfortunately was being driven by one of our larger customers. And unfortunately, that specific set of components became in high demand at a very quick pace, and it disrupted, kind of slid that production into this quarter rather than being able to build it last quarter.

Okay. Back up there for me, did you just say that the, there was high demand that led to the shortage and if so, was that high demand from your customer or industry at large? And I guess, did I hear that right?

Yeah, it was industry at large. So, it's a specific set of components that unfortunately was not available when they attempted to try to bring that in for our production. That has been since resolved and just began resuming production on that line again the last couple of weeks.

Thanks, Brett. So, does that imply that this customer, I mean, even though they, created, a problem with your revenues this quarter that their business has either does have or has the potential for significant growth given what you just described about the industry that they're in is strong?

Yeah, there is, there is some potential long-term growth. And might I mention as well, we have proposed going to a full turnkey procurement as well so that we can manage that supply chain and hope to avoid this type of hiccups in the future?

Okay. Thank you. And then let's talk tariffs for a moment if we could please. What has been the commentary or mindset of your customers that are currently in Mexico with you about that production there and just kind of walk through the dynamics there, if you would please?

I think, we -- initially I think we all thought that this was some leverage, some attempt by the current administration to get some leverage with Mexico on specific things that they're asking for. Then it became fairly evident and I think scared all of us over the weekend that this might become a real tariff that everyone needed to deal with. Since that time, of course, there's been a pause for 30 days on this specific tariff to Mexico, but that really has frankly, freaked out a lot of our customers. I think a lot of them are reflecting on how at a stroke of a pin can change the cost dynamics from outsourcing to Mexico, which has been in the past, something that's been fairly stable and predictable. So, I think that it's not just the tariff, but I think it's as well the mindset of our customers trying to figure out how much of a risk building thing in Mexico may cause on their own profitability. As we look at that, we offer some solutions. I don't think there's any perfect solution in this type of scenario, but that's one of the reasons why we wanted to share with the market our expansion into our domestic Arkansas facility. And then also the strategic direction of continuing to build Vietnam into a larger part of our of what it contributes each and every quarter. While there might not be any silver bullet to avoid all tariffs, I think each and every program has its nuances that one of those locations may be better than another in total cost set.

And relative to your large win that you announced, would you talk around as much detail around that as you can please?

Yes, for now they've asked us to keep that to anonymous, but we're sure excited about it and really has opened up a new industry for us. And since that time, we've actually even entered into a lot of different other quote opportunities within the power in technology and utility space. Super excited about this particular product. It's out in the market today and we're excited to be able to grow with this company as they've seen an increased demand.

Okay. Brett, if you will please allow me to be pointed here with a question. You all in the past have had some other large wins that you have announced and ultimately haven't had a permanently meaningful benefit to the company. I mean, if we add $60 million to revenues, that's a pretty big number. What gives you confidence that this actually does lead to a real meaningful increase and essentially a game changer for you all rather than, having something go haywire with it as some of the others have?

Sure. I think it is, it really hinges on the fact that they are well financed for one. Two is the actual product is a market disruptor. And you know, from what we see and from our vantage point there's going to be some significant demand for this particular product. And then three, it's already out in the market and functioning as intended. So, I think with those three things, we feel more confident at this point that this will really be a great program for us.

Great. Thank you for that perspective. I'll step back in line and if there are others that have questions, I'll wait for them. Thank you.

Thanks Bill.

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

Thank you. Hello, Brett. Hello, Tony. Just a few, a few follow up on Bill's question. With that new win in the energy resiliency space, was that, is that a product that is partly manufactured in-house by your customer and you are taking over that production or you becoming a second source of production? How does that work?

Yeah, George, we need to be careful on how much we share with that, but they're currently outsourcing it today and, looking for a larger contract manager or contract manufacturer with a global footprint.

Okay, great. Good. I won't ask much more there. Question on inventory. I think you noted quite correctly that the inventory over the last year has gone down, but I think that you had seven quarters of reduction and that in this particular quarter the trend was reversed. So, I imagine that's partly because of product that you could not ship, but how do you see that trending in the second half of the fiscal year?

Yeah, so absolutely, that's exactly what happened. The reason that our trend of continued inventory reduction flipped this last quarter, the second quarter, of course we missed on roughly $15 million to $20 million in revenue and a large part of that, of those components were already in route. So that was the reason for the slight uptick in overall inventory. My expectation is that inventory turns from what they are today, will continue to improve. Now, my hope is the revenue continues to increase throughout the rest of the calendar year. So that inventory will flex with that, but our turn still should improve.

Okay. And do you still have a fair amount of the inventory that's not on the balance sheet that's actually owned by customers?

Yes, we do. There's -- as we spoke before at the point in time components age, so they're in our warehouse for, let's just say 90 days. Then contractually, we actually invoice our customer for those. So yes, we still have quite a bit of that.

Okay. Great. Okay, try to understand the gross profit and the gross margin. And there was a drop in the gross profit that was $5.6 million. And I'm trying to do a calculation and help me if that makes sense. So, the last time that you reported your cost of material, it was roughly 62% of revenue. That was in 2018, 2019. So, I'm doing the same math and I'm basically saying on a revenue dropped sequentially of $18 million [Indiscernible] and then in order to get to that $6 million of decline in gross profit, it means your productivity and support went down roughly $1 million. So, it seems like the fixed part of the manufacturing costs hardly moved at all despite the big drop in revenue, and that very small drop in production and support what's facilitated by a drop in the payload versus the dollar. So, I'm trying to understand how that moves forward, because first of all, maybe are those numbers what numbers makes it?

Yes, I think those are directionally correct, George, and unfortunately in a very short timeframe, most of that production and overhead cost is pretty fixed. Now we can make changes to that, and I think Tony mentioned that we actually, we made some additional headcount reductions in January. But from a short period or within a quarter's time, most of that production cost is pretty fixed.

Okay. So that's reflected in those numbers. Very good. And then just looking at your revenue, you sort of our guidance, because of the uncertainty as you said, but two of the three factors that really impacted you in the December quarter, the production hiccups related to the holiday period and the component shortage. Both of those factors seem to be not recurring, at least for the entire month of March. Maybe the components for some of them. So, we should see a nice pickup. Is that -- and are you guys not guiding because of concerns about getting the top line right or is it more about the cross the [Indiscernible].

At this point, just coming off of a crazy weekend where many of our customers are still trying to digest, hey, we were going to have to pay a 25-point tariff on anything coming into Mexico. And there's again, there's currently a 10% on the table for additional 10% on things coming in from China. They're still trying to digest that and, will there be any shifts in either bringing product in quicker or will there be some delays of asking us to delay some shipments? So, it's kind of both. It's really, will there be any real big shifts in our customers’ demands because of that or because of what results in 30-day time? There's just a lot in the air right now. Contractually, if a tariff were to be enacted, that is a cost that we would pass on to our customer. Now, does that still, are we still competitive with other, with other contract manufacturers and those types of things? On the surface, you'd say yeah, because everyone is impacted the same, but it could force, you know, some additional competition and or transfers of legacy products maybe in internal or to another CM. So, all of those things, like we just, we felt comfortable to go ahead and pull the guidance for top line and bottom line, as you saw in quarter two, the bottom line is so drastically impacted on your revenue because we have so much in fixed cost. So, we'll readdress that in a quarter. But I'm hoping between now and then things settle back down to where we have a good and solid, predictable revenue stream and then we'll get back to offering guidance.

Very good. Okay. I'll go back in the queue. Thank you.

Thank you.

Thank you. [Operator Instructions]. And at this time we have no additional questions. I will now turn the call back to Mr. Larsen 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 in next quarter.

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