You're holding for today's conference. We are still many additional participants and the call should begin shortly. We do thank you for your patience and please continue to stand by. Please stand by. Good day. And welcome to the Key Tronic Corporation FY 2026 Q2 Investor Call. Today's conference is being recorded. After the presentation, we will begin the question and answer period. At this time, I'd 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'd like to thank everyone for joining us today for our investor conference call. Joining me here at our Spokane, Washington 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 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 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 the 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 2026, we reported total revenue of $96,300,000 compared to $113,900,000 in the same period of fiscal 2025. Revenue for the 2026 was adversely impacted by reduced demand from a long-standing customer and the transition of an end-of-life program. However, this impact was partially offset by new program wins and an increase…

Thanks, Tony. During the 2026, we continued to provide our customers with options to better manage macroeconomic uncertainties and enhance our potential for profitable long-term growth. We are excited about the significant investments made to our US and Vietnam locations. During the quarter, we witnessed the increasing number of customer program starts in Springdale, Arkansas. Started a new production line in Corinth, Mississippi in support of a growing consignment customer. And we shipped our first batch of medical products from Da Nang, Vietnam. Due to ongoing geopolitical tensions and tariff uncertainties, we began to execute our long-term strategy to wind down manufacturing operations at our China facility and continue to rightsize our Mexico facility. Demand from a specific long-standing customer has declined in recent periods, but we believe that recently won programs more than offset the loss in revenue in future quarters. Moreover, the continued market uncertainty and shifts of tariffs have unfortunately impacted the timing and launch of new programs. But those programs continue to slowly proceed. We are doing our best to work with suppliers and with our customers on options for manufacturing their products from different locations in mitigating the impact of tariffs. Our changes made to our manufacturing footprint and reductions have enabled us to offer improved mitigation options, particularly when our customers consider the varying implications of current and future potential tariffs. As part of our long-term strategy and in recognition of the continuing geopolitical tensions, tariff uncertainties, and increasing costs associated with China-based productions, we have begun winding down our facilities there and transferring several programs to Vietnam. As part of our global strip sourcing strategy, we will continue to operate in China with a small team focused on sourcing critical components locally. Over the past eighteen months, we have also reduced our total…

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

Great. Thank you. I was hoping to delve a little bit more. You referenced earlier in the call that can you hear me?

Yes. We can, Matt.

Okay. I'm sorry. I thought maybe this one was a saying they could not hear me. So wanted to circle back around like I was saying, the increased demand for existing customers. I was hoping to get a little bit more color on how significant that is. Is it across a wide variety of customers? And what do you sense is driving that increased demand?

Yeah. I would say that, you know, the large part there it's predominantly two specific long-standing customers. One is product maturation, particular design. Just, you know, the fact that there's a need for a refresh of this that had a rough order of magnitude, probably about a $20,000,000 hit to our overall quarter revenue. I think the next was essentially an end-of-life program. They're looking at replacing it down the road, but that one too roughly about a $7,000,000 reduction from last year's fiscal. Of course, offsetting that, those large decreases in revenue are some of the ramping new programs.

Okay. So you're not really seeing a ramp from existing customers that the ramp is really coming from new programs then? Is that am I hearing you correct then?

Yeah, Matt. We do have a few customers that we're seeing some increased demand on. I would say it's around a half dozen that are, you know, kind of impacting that increase from long-standing customers.

Okay. No. That's helpful. And then you also in the press release referenced the three new programs that you won. I was just hoping to get a rough size estimate of each and the timing of the ramp and then also where you're gonna be manufacturing each of those.

Sure. I think the first, we'll start with the automotive. That one will be manufactured down in Mexico. That will rough order could be up to $5,000,000 when fully ramped. I think the pest control to $2,000,000. I think that was actually in our US facility in Vietnam, and that could be up. And then the industrial equipment is also in our US location 2 to $5,000,000.

Okay. No. That's helpful. And then final question I'd like to ask. You folks have referenced in the past and again on this call today, that you have a number of tariff mitigation strategies. I don't think I've ever actually delved in and tried to better understand when you say that, well, what are you actually doing behind the scenes, and what can you do to help us understand better what you're doing there?

Yeah. I mean, that really gets to the core of our strategy, our long-term strategy to essentially have a lower-cost Asian facility that could eventually replace our China facility. You know, one of the biggest reasons we're winding down China is now that we've ramped Vietnam. We feel confident in the new technology and the new production equipment that we now have online. It really is ready now to essentially resolve the, you know, the China to US tariff situation and then also, you know, some of the geopolitical tension that we have. That's one piece. The other piece is that we offer either a US-made opportunity for those that would require that. But we also still offer, you know, the production down in Mexico. That currently you still can take advantage of the USMCA agreement that allows you to build things down in Mexico and bring it back up into the US and even consume it in the US under that agreement and avoid certain tariffs as well. You know, it's a complex algorithm that really we help our customers with coming up with the best solution. A lot of that is dependent on how much labor is required, where the components are currently being supplied, where could they be supplied from possibly using some more North American-centric suppliers that we have. And then basically, coming up with various price points of a total cost to our customer and saying, here's where we think it's advantageous to build your product. We feel confident based on our locations and footprint that we can offer, you know, a suite of different answers to our customers that really could mitigate tariffs regardless of where they end up.

Okay. Okay. And so whenever a prospective customer is coming to you looking to have you quote a new product or program, do you usually go back to them? And if they're agnostic where it comes from, do you go back to them and offer them pricing if we were to build it in Vietnam, this would be your price? US price and then a Mexico price, do they really have the full choice in spectrum and is that really how you approach it oftentimes?

It really is. And that I think that's one of the unique things that we can offer as Key Tronic Corporation is we can easily quote and offer from all three of those locations that you provided. And, you know, our customer, this is what the lead time would be required. Here's what your price is. You know, here's the pros and cons from building in each of those locations and really offer that to our customer to ultimately make that decision of where they want the product built.

Okay. Great. That's helpful. Appreciate the answers, guys.

You bet.

As a reminder, if you would like to signal with questions, please press 1. And our next question will come from George Melas with MKH Management.

Great. Thank you. Let me just pick up the phone. How are you guys?

Doing well, George. Thank you.

Good. Great. Just wanna review a little bit the gross margin. On an adjusted basis, it's roughly 7.9%. Which is better than a year ago, but it's down a bit sequentially. And I'm just trying to see if there's anything unusual in the quarter in the gross margin, something positive like the high level of tooling or engineering services or maybe something negative with some disruptions and the transition of the end-of-life program or other things like that.

Yeah. Just to mention a few, and I'm sure Tony will fill in as well. But I think some of the negative, some of the headwind we had during the quarter was, you know, we still are transferring programs from Mississippi up into Arkansas, the new facility. And, of course, with that comes some additional costs. I'd also mention that in our second quarter, as always, we really lose out on a week of production just due to the holidays. Our, particularly in particular, our Mexican facility was closed for a full week over Christmas. And then, of course, our domestic sites are closed for at least a half a week. So you lose some production time but, you know, that helps explain some of the sequential drop in the adjusted gross margin. We really need volume. And looking forward prospectively is in order to really increase our gross margin prospectively, we need to drive sales volume and utilize some of the excess capacity that we have in each of our sites. Tony, anything you'd add?

There was just to add to that, there were some slight mix changes that negatively impacted gross margin quarter over quarter.

Potentially? And mix changes Tony, do you mean different programs or different locations?

Primarily just different programs.

Okay. Great. Okay. Maybe another question on sort of you guys redoing the expectation to be net income breakeven and the June quarter, so just two quarters away? And with interest expense sort of remaining, let's say, $2,300,000 or in that range, you need. If we think of OpEx, normalized OpEx, that roughly $7,400,000. You need a roughly 10.7 in my basic calculation. Of gross profit. And that implies both revenue growth and margin expansion, I think. Some of the margin expansion will come from the consignment program in Mississippi. But can you comment on that and how you think that you're able to both grow revenue and margin?

Yeah. I think we would stick with that same. You know, we still anticipate achieving somewhere breakeven by the end of the fiscal year. You know, we mentioned a bit about that consignment program that to ramp nicely. It's definitely not to the level of revenue that we expect it to be exiting this quarter or even in their fourth quarter. There's more growth there that is required. But as we mentioned earlier, I think with that consigned program, as large as it is, you will also see some uptick in the gross margin percentage. So you'll see both. Our expectation is some additional revenue, but then also improvement in the gross margin percentage.

Okay. Any just a follow-up on that, Brett. Any particular reason for the program sort of ramping up maybe slower than you expected? Because it seems like it's a very important program for you guys.

No. You know, we expected that it would be a slow grow. You know, some of that required some additional equipment. We were able to procure that. It had some lead time to it. We actually ended up installing some of that over the Christmas holiday. And then, you know, unfortunately, down in Mississippi this quarter, you know, they got hit with some bad ice storm. So we are recovering from that. I think that'll have a slight impact into our third quarter. But won't disrupt the momentum of growing that consignment model. It just may delay it by a week or two as we get through this ice storm. But we fully anticipated that that would be a slow role to get to its peak.

Okay. And then just to try to understand, in Mexico, you expect growth in Mexico. Going forward? So does that mean that Mexico has hit sort of a bottom and that you restructured Mexico into let's say, a lower service but full capability, but maybe slightly lower service, but low cost. Operation. How would you characterize that?

George, I think I would kind of like what we mentioned is that we have found that we were not market competitive. We needed to increase our efficiency. We needed to invest in some automation. We really needed to be far more competitive in our pricing down in Mexico. I hope that we're at a bottom. You know, I can't don't have a crystal ball. But my expectation based off of just the recent history, just the recent visits that we've had down in Mexico and some of the quoting opportunities that we've been down selected to take it to the next round. I feel like we're more competitive in Mexico than we were. So, yeah, over the longer term, we're still expecting Mexico to grow. We don't have anticipated additional reductions in headcount other than those that we've already accrued for in our second quarter. But as you know, things change. We are looking forward to the review of the USMCA that is to occur midyear this year. And hoping that most, if not all, of that continues. As part of the trilateral agreement between us, Mexico, and Canada. You know? But things do change. But for now, yes, we based on the volume our expectation is that Mexico will grow. Of quotes and the recent visits by potential customers.

Okay. Great. And then just one quick final question for Tony. You mentioned the $1,200,000 savings per quarter once the ramp down or the wind down of the channel manufacturing operation is completed. That $1,200,000 is that the impact on cost of sales? Is it the impact on the EBIT line? How does that $1,200,000 flow through the P&L?

Well, yeah, it's a good question, George. So that $1,200,000 really is kind of taken into consideration the entire wind down of the manufacturing portion of our China operations. So it's across the board. It's up in COGS as well as certain SG&A as well and OpEx. So, you know, as we see and we expect to have that done by our fiscal year end. So at which point, is when we'd see that $1,200,000 begin to take full effect in our results. I would say the bulk of it is in cost of goods, but to Tony's point, there is also some OpEx that will be reduced based off of that wind down.

Okay. And that $1,200,000 in savings, what would be the impact on the EBIT line?

I would take the $1,200,000.

But if you have some COGS, wouldn't there be some revenue attached to the COGS that so the 1.2 is a net number, basically.

It is. Sorry. Yes. It is a net number.

Okay.

Sorry. I know. Okay. We know now what you're asking. Sorry about that, George.

Yeah. I just had to ask three times because I couldn't find the way to do it. I'm not surprised by that.

No. Thank you, George.

Great. Okay. Great. For your hard work. It seems like you're really doing a lot of stuff to make the operation better. So thank you very much.

And once again, if you would like to signal with questions, please press 1. Again, that's 1 if you would like to ask questions. We'll pause for a moment. And that does conclude the question and answer session. I'll now turn the conference back over to Brett Larsen for 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.

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