Good day and welcome to the Key Tronic Q3 Fiscal Year 2025 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 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. 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 third quarter of fiscal 2025, we reported total revenue of $112 million compared to $142.4 million in the same period of fiscal 2024. The revenue for the third quarter of fiscal 2025 was adversely impacted by the worldwide economic disruptions and uncertainty caused by the recent escalation and fluctuations in global tariffs, which resulted in delays, increased costs, and reduced demand for many customers. For the first nine months of fiscal 2025, total revenue was $357.4 million compared to $440.4 million in the same period of fiscal 2024. Gross margins were 7.7% and operating margins were a negative 0.4% in the third quarter of fiscal 2025 compared to 5.7% and a negative 0.4% respectively in the same period of fiscal 2024. The year-over-year improvement in gross margins for the third quarter of fiscal 2025 reflects cost-cutting and headcount reductions over the past three quarters. The results of the third quarter of fiscal 2025 also included government-mandated severance expenses in Mexico during the quarter of approximately $0.8 million and approximately $0.7 million in balance sheet adjustments for inventory and estimated collections from customers. In the coming quarters, we anticipate margins to be strengthened by additional cost reductions and improvements in operating efficiencies, resulting from our strategic cost savings initiatives. As production volumes increase and our recent operational adjustments take full effect, we expect to see greater leverage on fixed costs, enhanced productivity, and a more streamlined supply chain, all contributing to stronger financial performance. That said, the significant tariffs on China and potential tariffs on Mexico and Vietnam create significant uncertainties about costs and our margin performance in coming quarters. Our net loss was $0.6 million or $0.06 per share for the third quarter of fiscal 2025 compared to a net loss of $2.2 million or $0.21 per share for the same period of fiscal 2024. For the first nine months of fiscal 2025, our net loss was $4.4 million or $0.41 per share compared to a net loss of $0.8 million or $0.07 per share for the same period of fiscal 2024. The increase in year-to-date net loss is primarily related to the large reduction in revenue, partially offset by the reduction in costs made during the fiscal year. Our adjusted net loss was $0.6 million or $0.05 per share for the third quarter of fiscal 2025 compared to adjusted net loss of $2.2 million or $0.20 per share for the same period of fiscal 2024. The adjusted net loss was $3.5 million or $0.32 per share for the first nine months of fiscal 2025 compared to adjusted net loss of $1 million or $0.09 per share for the same period of fiscal 2024. See non-GAAP financial measures in our earnings release and the appendix to the slide deck for additional information about adjusted net loss and adjusted net loss per share. Turning to the balance sheet, we ended the third quarter of fiscal 2025 by reducing inventory by approximately $16 million, or 14%, from the same time a year ago. These improvements in inventory levels primarily reflect our strategic initiatives aimed at inventory reductions. We're pleased to see our inventory levels continue to become more in line with our current revenue. At the same time, the state of the worldwide supply chain still requires that we drive demand for parts differently than in historical periods. Many of our customers have revamped their forecasting methodologies and we have significantly modified and improved our materials resource planning algorithms. As a result, we should be better equipped for future disruptions in the supply chain and more able to react to changes that may occur with current and future tariff implications as we continue to manage inventory more cost-effectively. During the third quarter, we also reduced our total liabilities by a combined amount of $34.3 million or 14% from a year ago. Our current ratio has remained relatively flat and was 2.7 to 1 compared to 2.8 to 1 from a year ago. At the same time, our accounts receivable days sales outstanding were at 92 days compared to 85 days a year ago, reflecting reductions in net sales at higher rates than reductions in receivables. Operating cash flows were $10.1 million for the first nine months of fiscal year 2025, up from $6.1 million for the same period in fiscal 2024. This reflects our ongoing efforts to manage working capital. Total capital expenditures to date in fiscal year 2025 are about $3 million, and we are expecting capital expenditures for the full year to be approximately $6 million to $8 million. A significant part of this year and early next year's capital expenditures will be related to our planned expansions in Arkansas and Vietnam. While we're keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production equipment, surface mount technology equipment, and plastic molding capabilities, utilizing leasing facilities, as well as making efficiency improvements to prepare for growth and add capacity, particularly in our Vietnam and US locations. Moving further into fiscal 2025, we are pleased to continue to see our new programs ramping and cost and efficiency improvements from our recent overhead reductions taking hold. At the same time, we face great uncertainties related to tariffs, which we believe are causing increased costs, production disruptions, and reduced demand for many customers. Although we expect the new tariffs to increase costs for both Key Tronic and our customers, the current economic and political climates are too unpredictable to provide an accurate estimate at this time. After careful consideration of all relevant factors, we have decided not to provide revenue or earnings guidance for the fourth quarter of fiscal 2025. We expect to see growth in our US and Vietnam production, have a strong pipeline of potential new business, and remain focused on improving profitability. Over the longer term, we believe that we are increasingly well positioned to win new programs and profitably expand our business. That's it for me. Brett?

Thanks, Tony. The rapid, unprecedented increases and decreases in tariffs have significantly impacted both our business and our customers. As previously announced, we’re underway with the buildup of new production capacity in both Arkansas and Vietnam. At the same time, we have continued to streamline our Mexico operations with further headcount reductions to enhance efficiency, building on similar actions in recent periods. The sudden increases and decreases in tariffs have unfortunately impacted production across all of our facilities, especially the tariffs on Chinese components. Clearly, these global tariff wars are outside of our control and will similarly impact all other manufacturers as well. We are doing our best to work with suppliers and our customers on options for manufacturing their products from different locations. To manage this process efficiently, we have been proactively expanding our production footprint in strategic locations to better serve our customers and improve flexibility offered to our customers in choosing which locations to build their product. Our expanding footprint enables us to offer improved mitigation options, particularly when our customers consider the varying implications of current and future potential tariffs. We’re excited to announce plans to add additional capacity in key regions. In the US, we're expanding our clean tech, cutting-edge manufacturing operations in Arkansas. We expect to invest more than $28 million in our new flagship manufacturing and research and development location, which we believe should create over 400 new jobs in the next five years. We're delighted to be enhancing our operations in a region where we have maintained a longstanding presence and a strong team and can benefit from a business-friendly environment. Our US-based production provides customers with outstanding flexibility, engineering support, and ease of communication. In Vietnam, we have ample space in our current facility to more than double our manufacturing capacity. Our Vietnam-based production offers the high-quality, low-cost choice that was associated with China and Mexico in the past. In coming years, we expect our Vietnam facility to play a major role in our growth. We anticipate that these new facilities in the US and Vietnam will come online during fiscal 2026 and enable us to benefit from customer demand for rebalancing their contract manufacturing and mitigate the severe impact and uncertainties surrounding the tariffs on goods and critical components manufactured in China and in other locations. Our customers are very excited about our plans to increase our production capabilities in the US and in Vietnam. These initiatives reflect both the longstanding trends to move more of their production away from China, as well as de-risk the potential adverse impact of tariff increases and geopolitical tension. At the same time, we are seeing a sustained trend of wage increases in Mexico. As it has become clear that these changes in the base cost of Mexican production are longstanding, we have continued to streamline our operations in order to be more cost-competitive in the market. Our improved cost structure in Mexico is anticipated to lead to new programs and growth over the longer term. During the third quarter of fiscal 2025, we continued to win new programs in telecommunications, pest control, energy storage, medical technology, and temperature controlled shipping solutions. Despite many uncertainties and disruptions in global markets, our strong pipeline of potential new business underscores the continued trend towards onshoring and dual sourcing of contract manufacturing. We expect that global tariff wars and geopolitical tensions will continue to drive OEMs to re-examine their traditional outsourcing strategies. Over time, the decision to onshore production is becoming more widely accepted as a smart, long-term strategy. The combination of our flexible global footprint and our expansive design capabilities continues to be extremely effective in capturing new programs. Many of our large and medium-sized manufacturing program wins are predicated on Key Tronic’s deep and broad design services. And once we have completed the design and ramped it into production, we believe our knowledge of the program's specific design challenges makes that business extremely sticky. We anticipate a continued increase in the number and capability of our design engineers in coming quarters. We also continue to invest in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection, 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. We believe this expertise will increasingly set us apart from our competitors of similar size. While the global tariff policies are creating major logistical challenges for us, our suppliers, and our customers, we believe geopolitical tensions and heightened concern about tariff and supply chains will continue to drive the favorable trend of contract manufacturing returning to North America as well as to our expanding Vietnam facilities. We believe these tariff challenges were a significant factor in component delays and reduced demand for many of our customers, which hammered our growth and profitability in the third quarter of fiscal 2025 and continue to disrupt our business even in the fourth quarter. Nevertheless, we continue to rebalance our manufacturing across our facilities in the US and Vietnam. We are, however, excited to see the results of right-sizing our operations and the increased generation of cash flow over recent quarters. We're moving forward with a strong pipeline of potential new business, and we're seeing significant improvements in our operating efficiencies. Over the long term, we remain very encouraged by the cost reductions made over the past 18 months to become more market competitive, our increasing cash flow generated from operations, enhanced global manufacturing footprint and the innovation from our design engineering team. All of these initiatives have increased our potential for profitable growth. This concludes the formal portion of our presentation. Tony and I will now be pleased to answer your questions.

The first question will come from Bill Dezellem with Titan Capital.

First of all, would you please walk us through the five new business wins that you discussed and share the dollar amount that you anticipate each to be, number one? And then number two, if there are any interesting insights that any of those program wins will provide us or that are informative and share those with us, if you can, please?

Bill, probably the first one is a $12 million telecommunications program that will be manufactured in our Mexico facility. It is the first of what we're hoping is many programs from a fairly large conglomerate. This will be the first order from them. We're hoping to ramp that towards the second quarter of fiscal 2026 and be in full production by this time next year. The second one was as well a fairly large Fortune 500 company that is allowing us to start building some pest control devices. We've been chasing this one for quite some time, excited about this opportunity. It's about a $6 million opportunity that will be in Vietnam. Hoping that we actually land some additional programs from this customer at other of our Key Tronic facilities as well. The third is in energy. Combined, right now, it’s about a $7 million program to be placed in our new facility in Arkansas. It's currently in the development design stage. Not expecting any meaningful production for at least six months on this one, but excited about the opportunity for this and definitely is helping near shore some of their intent to manufacture in the US. So that would be the third. The fourth is a consumer product, roughly $2 million to $5 million. That as well is in Arkansas. And then the fifth is kind of unique; that's actually a design contract, which is starting out to our design and engineering folks roughly around a million-dollar contract. But once that goes into production, that could be easily a $5 million to $15 million program, which will definitely disrupt a little bit of the market that they're hoping to penetrate. Well capitalized. I think that’s a good demonstration that our design team continues to be a sales channel for future production.

You mentioned a couple of Fortune 500 companies. That's a little bit unusual compared to what we are accustomed to hearing. Now, maybe you're just sharing something different, or maybe that is unique. If it is unique, would you walk through what maybe has changed?

Bill, I'm not sure if that's unique. We deal with a variety of different size divisions and companies within Fortune 500 conglomerates. What's great, though, is once you get your foot in the door, once you become a known supplier or an approved vendor, it really does open the door for a lot of cultivating, not only within that division, but other sister companies as long as you're able to perform and do well. So those are very exciting for us because those really kind of are an open door to additional opportunities down the road.

Given the uncertainty in the macroenvironment, would you please discuss, I believe it was a $60 million prospect that you had. Sorry, it was a win that you had in the past that you anticipated would be ramping at some point in the coming quarters. What impact, if any, the macroenvironment volatility is or is not having on that?

That's a unique program. I think it is not going to have an impact on that. I think one of the reasons they chose to go with Key Tronic was not only our design capabilities, but then also our global manufacturing footprint. So, initially, we were planning to build it in one location. With the uncertainties of tariffs, we've now moved to a new location. That is actually going to start generating income in our first quarter of fiscal 2026. It'll be a ramp, but I'm still expecting that at some point to still approach that $60 million. They've recently received a fairly large award from a very well-known utility, and I think that'll just continue to grow. I think that's a bright spot, and we're expecting that to have some revenue in our first quarter of fiscal 2026.

When would you expect that to be ramped to its full $60 million?

How did I know you were going to ask that, Bill? My expectation is that it's going to take probably 12 months to 18 months to get there.

Our next question will come from George Melas with MKH Management.

Quick question about the two unusual items that you guys spelled out. The severance in Mexico, is that in cost of goods sold?

It is.

The other $0.7 million, it seems to be partly cost of goods sold, partly OpEx. Would that be right as well? What would be the mix?

I would say it's about $400,000 in OpEx, $300,000 in cost of goods.

Then if we sort of do an adjusted gross profit, we have to add back roughly $1.1 million So you get to roughly $9.7 million and then adjusted gross margin of roughly 8.6%, 8.7%. And that's on a fairly significantly drop in revenue over the last few years. So where could your gross margin go as you grow and, let's say, get back to $140 million?

The silver lining of seeing some reductions in revenue, while it's hammered our profitability during this fiscal year, I think the reductions that have been made to date and are currently being made will only further improve anticipated improvements in gross margin. Another way, as you mentioned, with incremental revenue, once you have your fixed costs covered, once you hit the break point and you add additional revenue above and beyond that, you should have an incremental margin well above the 10%. It’s tough for me, at this point, to project what that could be, but I will say that what we've done over the last 18 months has enabled us to, with some growth, if we're able to actually achieve some revenue growth as we hope and expect, not hope, we anticipate and are driving towards, that will have a robust impact on gross margin. My expectation is that we should exceed 10% gross margin at some point.

And what's the revenue required to exceed 10% in your view?

That's largely dependent on a whole litany of factors. It's tough to just give you a dollar amount with the uncertainty in tariffs. Are we going to be required to get some pricing decreases? There's just a whole litany of things. But if all things were the same, another $20 million of revenue, at least on paper, would generate somewhere near 10% gross margin.

Overall? Then the entire operation is at 10%.

Yeah.

Is there a way to look at the revenue and the revenue change and try to put that in various buckets? Reduced demand from existing customers, churn, new revenue from new customers. Is there a way to sort of like break that down and is that a useful exercise? I don't know. I think it is. Is there any way you can add some color to that?

Yeah. I guess there has definitely been a step function in the reduction in demand from existing customers, but kind of offsetting a portion of that have been new program wins, and that's the case each and every quarter. But it seems like within the last 12 months, there's been a significant reduction in existing customers well beyond what we've seen historically. So, of course, internally, we analyze that and try to determine what are we doing wrong or is this just some bad circumstances of the macroeconomic environment. It's across the board. There are a few that we probably should have done a better job earlier on to ensure that we'd get the incumbent or the new generation of that device or program. Some of it was end of life, and really the demand has continued to decrease over time. There are a few in there that we actually asked for us to no longer manufacture because they were difficult to work with, and we saw some risk, some financial risk. So it's a whole number of items. But I will tell you, the last 12 months, definitely, we've seen more historical reduction of existing program revenue than what we typically see.

As you look at that, it doesn't feel like it's something that you have done or something you have missed in particular. You feel like it's a much more reduction among your customer base.

The biggest point that I think we gleaned out of that is we needed to make sure that we were competitive from a cost structure in the market. That also has driven us to be far more efficient, reduce some headcounts, and make sure that we remain market competitive, particularly down in Mexico. I think that was something we definitely learned from this. And the others were equally driving. Some more US manufacturing capabilities. Similarly in Vietnam. I think as well making sure that we are a part of the design function of our customers. That definitely makes that business far stickier. And if you're helping them with designs, you're seeing the next generation well before they may be out quoting that out on the market with other contract manufacturers.

Maybe a final question on working capital. You guys have done a lot of progress this year, but it seems like there's still a lot of progress that could be done. If you look at inventory and accounts receivable, I think hopefully you will have some revenue growth, so that will have an impact on both of that. But how much better can you perform there? And maybe on the inventory, what percentage of the bills of your customers do you manage or is managed by your customer? And does that make a real big difference?

Predominantly, all of our customers' bills of materials is managed by Key Tronic. There are a few components here or there, some custom mechanical or something. Sometimes we'll get that consigned by our customers, but I would say over 90% of the bills of materials is managed by Key Tronic. Now, do we anticipate some incremental improvement in working capital? Yes. That'll be largely dependent as well on how quickly we are able to ramp revenue in a positive direction. But I think the goal to have inventory at 4 turns is something that we're continuing to drive towards.

And what is the turn, how do you calculate the turn right now?

Tony, do you know what the specific turns are? But, roughly, you should have in inventory, at any given point, between raw materials, work in progress, and finished goods of about a quarter’s worth of revenue.

And our next question will come from Sheldon Grodsky with Grodsky Associates.

It's been quite a struggle here for Key Tronic for the last couple of years. Let me ask a quick question. I'm in the camp of investors who think that we might be slipping into a recession in the near term. You have a new credit agreement, and you're doing a major expansion at this time. Do you have leeway under the credit agreement if you continue to have disappointing quarters, do you think, or are there hair-trigger provisions that might put you into early defaults if you have small losses?

Sheldon, with that, I'm glad that we were able to refinance some new debt a few quarters ago. It is largely dependent on availability, not necessarily the profitability of the company. Right now, there’s ample availability. We're continuing to drive debt down. We're expecting that as well over time. Cash is far less of a concern right now than it was, say, a year ago. We've got a good, strong relationship with the new debtors and have a line of sight of continuing to provide for all of the expected capital expenditures. So, no, while it's always a concern, it's definitely not the same level of concern that where we were a year ago.

Obviously, you've had declines in revenues recently for a variety of reasons. Effectively, you're already in a recession, just going based on the gross numbers, the top line. Does it feel like things are picking up from that or just it’s so crazy that you can't tell very much of anything from your customers anymore? You use the term in the press release; you were talking about paralysis. Hesitancy and business paralysis in many of our customers' businesses. Is that getting better or worse now? So, do you have a sense that people can live with it?

Yeah. Sheldon, there definitely is a hesitancy to make business decisions in uncertainty. We've definitely seen that over the past few months. There appears at this point to be somewhat of a balancing of that and is this chaos now the new normal. I don't know. I will tell you, we have definitely seen within the last few months some hesitancy to move forward on projects that should have already been started and even some new business programs that we would have anticipated to have, already building some production. And equally, we're trying to manage and look at our customers' inventories. I see some going up; I see some coming down. For the large part, I think we have developed ourselves to be able to survive on far less revenue, and we can continue to do that as necessary. But I'm expecting actually some growth even in light of a potential recession in the next fiscal.

And that does conclude the question and answer session. I'll now turn the conference back over to Mr. Larsen for any additional or closing remarks.

We appreciate the time today, and Tony and I look forward to discussing next quarter's results a quarter from now. Thank you.

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