Please stand by. Good day, and welcome to the Key Tronic Corporation Q4 Fiscal Year 2025 Investor Call. Today's conference is being recorded. After the presentation, there will be a question and answer session. At this time, I would like to turn the call over to Tony Voorhees. Please go ahead.

Good afternoon, everyone. I am Tony Voorhees, Chief Financial Officer of Key Tronic Corporation. I would like to thank everyone for joining us today for our investor conference call. We are excited to be calling in from our new Springvale, Arkansas facility this week. Joining me here 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 and quarterly 10-Qs. 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 a 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 the reconciliations to the most directly comparable GAAP measure are provided in today's press release, which is posted to the Investor Relations section of our website. For the 2025, we reported total revenue of $110.5 million compared to $126.6 million in the same period of fiscal 2024. The revenue for 2025 was adversely impacted by decreased demand from two large long-standing customers. In addition, the recent escalation and…

Thanks, Tony. Fiscal 2025 was a year of transition and uncertainty. We anticipated a reduction of demand from two long-standing customers. We had fully expected to fill that void with recently won new programs. However, with the uncertainty of recent variant tariffs, most of these launches were delayed into fiscal 2026. The reduction in overall revenue had a significant impact on our bottom line financial results. Nevertheless, during the fiscal year, we were able to rightsize our cost structure in Mexico and introduce new production efficiencies in automation that have allowed us to become more cost-competitive. Additionally, we transitioned our manufacturing footprint by investing in a new facility here in the US and investing in new production equipment in Vietnam that increases our capacity and capability. The sudden increases and decreases in tariffs have unfortunately impacted new program launches across all of our facilities. We are doing our best to work with suppliers and our customers on options for manufacturing their products from different locations in best mitigating the impact of tariffs. Our changes made to our manufacturing footprint and our cost reductions enable us to offer improved mitigation options, particularly when our customers consider the varying implications of current and future potential tariffs. We are moving full speed ahead with adding capacity in key regions. In the US, we are expanding our clean tech cutting-edge manufacturing operations here in Arkansas. We expect to invest more than $28 million in our new flagship manufacturing and research and development location here in Arkansas, which we fully believe should create over 400 new jobs over the next five years. We are delighted to be enhancing our operations in a region where we have maintained a long-standing presence and a strong team and can benefit from a business-friendly environment. Our US-based production provides…

Thank you. If you would like to signal with questions, please press 1. If you are joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press 1 if you would like to signal with questions. And our first question will come from Matt Dane with Titan Capital Management.

Good afternoon, guys. I was curious looking at the new wins in the quarter. Can you give us the range of sizes of those six new wins and how we should be thinking about those ramping?

Yes. For the quarter, those were predominantly around the $5 million program size. Three of them in Mexico. The others are in the US. You know? And then, of course, the data processing could exceed $20 million, and that's more of a service consigned materials contract.

Okay. Great. Good to know. I also wanted to talk about the Vietnam medical device manufacturing capability that you folks are getting set up over there. How are you thinking about that? I know you called out that you want a medical device. It sounds like that's either for the US or Mexico where you will be manufacturing that. But the go-forward opportunity, are you talking with potential customers around that? And what attracted you to build out that capacity over there?

Yeah. Absolutely. That's a great question. So we have always wanted to grow Vietnam. I think it was hampered largely after we took it and started that in Da Nang. Right around 2019, 2020. I think we were hindered by COVID for a number of years and being able to market and sell that. That has drastically changed. And I think now being certified to build medical products there, and actually now having a program slated to start there in fiscal 2026, I think that will just have our Vietnam shop show even better and more capable. And we are expecting additional new opportunities there in Vietnam from that.

Great. And final question if I could ask here. You folks on the call and in the release talked about how you have seen an increase in new program bids recently. I was hoping for a little bit of additional color here. Is it just pent-up demand? People cannot continue to sit around and wait for 100% tariff clarity? Do they feel like they have enough clarity on tariffs? Is this something you are doing to drive this increase in bidding activity? Just yeah, what more can you tell us around that?

Sure. Probably two points. Probably the foremost is us becoming more cost-competitive. I think the cost reductions we have done over the last two years have enabled us to provide what we have mentioned as commodity pricing for certain customers that require low cost. That has definitely opened up our opportunities to close out on quotes that we may have lost historically. I think the other is the impact of investing in key locations. Our new Arkansas facility, we are extremely excited about. We have had a number of customers come and visit it. There is quite a bit of pent-up demand for US manufacturing, particularly in light of the varying tariffs and geopolitical tensions that are going on. That has definitely impacted recent quote opportunities as well. So I think it's kind of the combination of all. It's both the cost reductions but then improving our actual global footprint to provide our customers with more options for tariff mitigation.

Great. Appreciate the color.

Thank you.

Once again, if you would like to signal with questions, please press 1 on your touch-tone telephone. Again, that is 1 if you would like to ask questions. And our next question will come from George Melas with MKH Management.

Thank you, operator. Hi, guys. Two questions. Hi, Brett. Question on the DSO. Somehow, I probably calculated somewhat differently than you guys, but it seems that receivables came down by $16 million sequentially. And I am just wondering whether that's possible or whether there's something, some factoring or some other factor that sort of explained that decline in your receivables.

Yeah. Good question, George. Appreciate it. This is Tony. So, the large driver of that reduction in AR is primarily due to the reduction in revenue over the quarter. There is no factoring. I think we did a better job of collections during the year. There was also, unfortunately, some write-offs, some bad debt that occurred during the year. But there was no factoring.

Okay. Great. Regarding the write-off in the bad debt, was there a significant amount of that in the fourth quarter?

Yeah. There was $1.1 million in the fourth quarter. We did not write it off. We just reserved for it. So but that did negatively impact our result.

Okay. And that flowed all through to cost of goods sold, I guess, then?

It's down in SG&A, actually.

Okay. Great. And that reduced the net receivables that you had.

Correct.

Great. It's still an impressive reduction in the DSO. Do you think that could come down further? Is it just better collection, or is it somewhat different terms in your contracts with your customers?

Yeah. I would say it's primarily collection efforts, George. We have done a better job of collecting recently from our customers. You know, we have really worked hard at building those relationships and making sure we have a path to a contact that can help us out when we need it.

Okay. Very good. And then help me understand a little bit better the potential size of that manufactured services contract that you singled out with the data processor OEM. You say it could be $20 million. But given the fact that they would consign the parts, how does that compare with some other contracts that you may have? From a size perspective? Because the $20 million would not include, my understanding, does not include the parts flowing through your P&L. Is that correct?

Yep. Absolutely. And I think that's one of the reasons we wanted to make mention of it. While it is only a $20 million program, it's a strong $20 million program. But that's just for the manufacturing services that we would provide. So, you know, this is probably, we have done other consigned material contracts but nothing to this scale. And so, while it's $20 million additional revenue to Key Tronic Corporation, it should have a strong incremental improvement in margin. You know? Because there's far less material content to it. So, you know, is that $20 million win really the equivalent of an $80 to $100 million program that's turnkey?

Exactly. Okay. And that contract was signed in June?

It was. It was in the fourth quarter. And we are ramping that as we speak in our Corinth facility.

Okay. And is it going to be just in the Mississippi facility, or will it be in other places as well? Because it seems like a potentially large contract.

It is. It's currently scheduled for Mississippi. But with this new Arkansas facility, we have got plenty of capacity here as well. If it continues to grow, we may need to dual source it. But at this point, it's scheduled just to be within the plan.

Okay. Thank you, Brett. And in fiscal 2026, what would you expect in terms of revenue from that contract? You know, let me ask you. First of all, maybe the year and the run rate as you end the year. I'll make it more complicated, Brett. I'm sorry.

Yeah. I know. You're not going to let me get away with that. Right. You know what? With all ramps, it always takes longer than you hope. Our expectation is we'll be at the $20 million per year run rate by 2026. But there's still, you know, there's still a lot of unknowns between now and then. But that's what we're trying to project to be at that level as we exit the fiscal year.

Okay. So it means that it would have largely ramped to the $20 million run rate by June 2026. So that's good.

Okay.

Great. And in Mexico, you are adding three new programs, six programs, three of which are in Mexico. How do you see your Mexico operations in fiscal 2026? Do you see them growing or sort of flattening? How do you see that part of the operation?

I think with these recent program wins, we will see some growth in Mexico. You know, we found that we were not always cost-competitive. And I think we've made the correct reductions and changes to the cost structure down there. And the other thing is right now under the USMCA agreement, it really is a perfect way to mitigate tariffs for US-consumed goods. So I think they're going to continue to get opportunities down there. You know? And as you're fully aware, that's where predominantly a lot of our vertical manufacturing needs exist. So even if it's not a full box build down in Mexico, I could see us building subassemblies, either sheet metal or molded components, that would then be shipped into a Vietnam or US location. So it's still going to be very much a critical operation facility for our success in the future.

Okay. Great. And then maybe a last question. Any thoughts about your gross margin in fiscal 2026 and maybe longer term? Is there any sort of thinking that it is impaired, or do you think it can come back to the nines and maybe even double-digit at some point?

That's always our goal. That's always our strategy to get there on paper. It looks like we can get there. There's just a lot of things that need to happen. So we definitely are not happy with the results of this past fiscal year, and that includes gross margins. We're expecting those to improve. And I think now more than ever, with the increased capacity that we have in Mexico, in the US, and in Vietnam now, it's incumbent on us to really grow our top line and utilize some of that capacity in order to get to reasonable gross margin.

Okay. So from an incremental gross margin, as you add revenue, what do you think that could be?

It can be 15 to 20%.

Okay. And that would hold in all three locations.

Yeah. Broad brush. Yes.

Okay. Great. Thank you very much. Good luck in the New Year.

Of course.

And once again, if you would like to signal with questions, please press 1 on your touch-tone telephone. Again, that is 1, and we'll pause for just a moment. And that does conclude the question and answer session. I'll now hand the conference back over 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.

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.