Conference Transcript - STRT 2026-06-10

Operator

Good afternoon, and thank you all for joining us for our next East Coast Ideas Conference presentation. Presenting next is Stratix Security Corporation, which trades on NASDAQ under the ticker symbol STRT. Representing the company today is their president and CEO, Jennifer Slater, and CFO, Matthew Pauley. Jennifer, the floor is yours.

Jennifer Slater, CEO

Good afternoon, everybody. I'm excited to be here. Matt and I were here last year, and June 11th is Matt's birthday. That's when we were here last year, so I'm sure he's excited. He's not presenting on his birthday this year. I'll start with the Safe Harbor Statement, which is, you know, we may say some forward-looking statements, and I think you're all aware of the Safe Harbor Statement. If you're new to Stratec or don't know much about Stratec, we've been a public company since 1995. 95 our current market capitalization is around 330 million on the right hand side you can see that we've got a very diverse set of products that can be found all through the vehicle really from the front of the vehicle with hood latches or power front latches those are for evs to the rear of the vehicle with power liftgate tailgates and latching mechanisms i'll talk a little bit more about our products on subsequent slides we've been through a transformation here over the last two years I joined the company in July of 2024 I convinced Matt to join me in November of 2024 and there's been a lot of focus on many things across the company but really it started with our cultural change and our employees our team how we talked about our company what we focused on, and how we manage that message and communication to our investors, our customers, and our employees. And so this year for this conference, you can see we have a new brand and a more refined vision of who we are and what our focus is. We have a diverse set of products, which I spoke about already, and you can see the penetration by product down at the bottom of the graph. And then our sales by customer historically have been focused on the large North American customers with Ford, GM, and Stellantis, and we also have some business with Hyundai Kia. Our manufacturing facility, we've got, we're vertically integrated in Milwaukee where we do die cast, stamping, and plating. And then we have four assembly plants in Mexico, three in Juarez, one in Leon. And then we have a customer center in Auburn Hills, Michigan, where we have our sales and engineering. We also have a small center in Korea that supports our relationship with our Hyundai Kia customer. As I said, we focused on how we talk about our products, and really our products fall into three areas. Permission, which is really where the company started with our lock and key technology. We've most recently been focusing on our digital key technology. Digital key technology is still a key fob that works seamlessly with your phone. So what we have seen is there have been many customers who have thought about, do you really need a key fob if I still have my phone? For those customers who have made those decisions, they're actually going back to having a key fob for many reasons, one of being transferability if you valet your car, if you hand your key fob over to a family member. So we see the key fob continuing. We also have some aftermarket business. About 78% of our revenue is in aftermarket, and we supply our key fobs through the aftermarket. The rest of our products are handled more through service. then we talk about motion and hold and i will tell you we had a little bit of a debate as a team is that one area of the business or two but not everything is power access right where you have a rear lift gate there's a manual version and there's a power version so motion is where we have actuation and motors that help with access and then latches is really our hold segment of our product right now we support all the way from a very manual latch where you close your your hood of your car and it's a manual operation that you create the forces that make the locking locking mechanism and then we also have more complex latching mechanisms which are cinching latches that as you close your your trunk or your tailgate the latching mechanism actually pulls in to make the locking mechanism. What I would say across all our products and where we really differentiate and why the company's had such a strong history and foundation is it's been around our technology and the engineering solutions we bring our customers to what they're trying to solve all across access. And it's not just mechanical components. It's the integration of the software, motors, and mechanical components to make sure consumers have a seamless experience. From a capability standpoint, we have a wide range of capabilities. It all starts with design and engineering, making sure we have the right quality and delivery systems for our customers, and then where we are vertically integrated with injection molding, painting, die cast, plating, and stamping. But we also have assembly, a large portion of assembly in Mexico. And then we do have PCBA manufacturing. I would say that that's really a balance of where it makes sense for us to manufacture versus where it makes sense to leverage scale from a buy standpoint. But it allows us the technical capability to understand how the PCBA impacts our overall products. If I step back and think in a more holistic way about our transformation in Stratech, if we think about the legacy of Stratech where we were you know lack of scale we've been primarily North America with significant customer concentration and for those of you who know automotive it's a highly cyclical and competitive industry it's a long cycle industry which means that there's you know from the history of where we were we see our our revenue really following North America production over the next couple of years and i'll talk on a subsequent slide how we think about growth and where we're working with our customers to drive the longer term growth if we think about okay now let's translate to the future what is our vision for strat tech in the future we want greater scale obviously we want to continue to work on our organization and driving efficiencies through the organization delivering a more stable and predictable business and having greater customer diversification. Greater customer diversification is very important because as consumer demand changes and there's winners or loses in the market from a customer and a platform standpoint we want to make sure that we have more penetration to help avoid the cyclical nature of platforms winning or losing in the market. We do feel we've got some strong strategic enablers you know we've got innovative products and differentiated solutions as I said that's really where the history of the company has been built on we've got strongly strong long-standing relationships with customers what that means is you know even though we've got a small segment of customers we know how to work in automotive we know what OE requirements are and we can translate that to a broader set of customers we're continuing to realign our cost structure which is important in driving our margins but it's also important to make sure we have cost competitiveness for our customers for our future we've got a strong balance sheet which matt and i always say the it's a good problem to have we're not worried about liquidity every day we're really worried about transforming the business and making sure that we've got a long standing uh story for uh all of our stakeholders and then we've got a refreshed leadership team so So the majority of our executive team has been new since I joined, and then one layer down with our senior leadership team, about 50% of those 40 employees have been here within the last two years. So we've got a lot of momentum and excitement and engagement behind the team, and again, it all really starts with our employees to build on where we're going with the transformation. I mentioned a long cycle nature of the business and I focused on hey we see our revenue moving with the market over the next two years this is an important slide just to articulate where we've historically played with our customers where we're focusing on and how do we see that revenue trajectory coming through so I would say the legacy focus for Stratech is when we've gotten a request for quote from a customer, that's when we engage. The issue with engaging at that time is you're not developing the relationship with a customer to make sure that you are providing the solution that they need for the vehicle and speccing yourself into that vehicle platform. If you do that longer term up front, you're building a deeper relationship with the customer and you're also making sure that you will be specced into the vehicle for the request for quote and then once it goes into launch you're on that platform for the life of the life of the program which is five to ten years depending on the customer and the platform so as we think about diversifying our customer base we're really shifting our focus to have that early customer engagement obviously we're still working in the request for quote phase where we've already built relationships as quotes are coming up we're being very active in the market But as we're thinking about building our diversification for our customers and our longer-term relationships, we're really on the left of the chart, which you can think about starts unlocking value, you know, five-plus years or so to launch when you see that revenue start coming through. Now, if I think about what we've done and where we're still in process, again, we're really proud of the transformation over the last two years, but we still feel like we're in early innings. uh there's still a lot to do and there's still a lot of opportunity in the business both on the operational improvements and on the delivering the revenue growth so you know we've we've focused on four key priorities making sure we have the right team having the operational stability and rigor to drive business performance unlocking the value proposition and making sure that we're delivering the margins and thinking about longer term growth and then modernizing our operations what we've completed over the past two years is if I look at our operational excellence we've reduced head count by 20 percent over the last 18 months that's realized 9.5 million in savings we've captured 15.6 million in structural and opportunistic pricing over the last 18 months and we've looked at our footprint and we've initiated a sale leaseback process for a Milwaukee facility to adapt for space needs. Basically, it's two times the size of what we need, and there's a lot of investment that's needed in the building. What we still have in process is we're still continuing to work on our culture to break down our organizational silos. With our rebranding of the business, what we focused on was three culture pillars around innovation collaboration and driving results we've got strong teams but we need to make sure they're working together for a common goal and we've been very focused on that with our rebranding we're looking at continued operational improvements we've started very simple simple when you think about automation and we've started with what the plants have already demonstrated an example of that which I've communicated before if you listen to us is where we've got very manual operations in a station like screwing in a screw in an assembly operation we've automated that process how we're thinking about our automation longer term is we call it disruptive automation but I would say that it's been proven technology for 20 years it's more disruptive for Stratech where we built assembly lines that are very dedicated for a product or a customer we're looking at how do we have product families, that we can have flexible operations that utilize a much smaller footprint and have more efficiency and less labor. We know that's really important for our future competitiveness and also to continue on our longer-term path for our margin improvement. I talked about the work we're doing from an organic growth standpoint, and I talked about this story a while ago earlier today you know while we're working on our operations specifically in our Milwaukee to make sure we've got the right lighting we've got the right paint we've got the right environment we're also moving our headquarters to a more modern facility for our salary staff that right now are combined with our manufacturing location I have a 23 year old son who's recently entered the workforce who told me mom if you want to drive talent and bring them into the workforce you're gonna need a nicer building so it's not about always you know getting a nicer building but it did resonate with me that we want to attract

Matthew Pauli, CFO

talent we want to be the desired place to work and we need to make sure we have an environment that's attracting the talent that we need that's so important to our transformation so with that I'll hand it over to Matt so I'll walk through the financials and then we'll open it up for Q&A as a reminder we are a June 30th fiscal year-end so as you look at the slides here on the left-hand side is our results for the first nine months of the fiscal year so we generated about 427 million in sales which is up about three and a half percent on a year over year basis during the first half of the fiscal year we saw single digit sales growth combination of additional volume and some pricing that we had implemented last january our most recently completed quarter was our third quarter where we did see a sales decline of about four and a half percent that was consistent with our expectations is just softer oem production builds and some ev cancellations on the right hand side of the slide you see our sales trend over the last four years which you see steady growth which is a combination again of pricing and volume on a on a trailing 12-month basis our sales were 579 million our sales split is roughly eight percent in the aftermarket and the balance is all in the oem and as jen touched on our sales growth in the future will largely follow north American automotive production volumes next if we look at our gross margin and our SAE or sales admin and engineering expenses you'll notice the significant improvement in our gross margin from fourteen point three percent last year through the first nine months to sixteen point eight percent so a two hundred and fifty basis point improvement we're proud of the the improvement in our gross margins despite the headwind from currency it's a combination of the pricing actions we took we've also done some restructuring actions to right size our cost structure primarily in our Mexico operations. As Jen touched on, we have one manufacturing facility in Milwaukee, Wisconsin, and we have four facilities in Mexico. Being in Mexico, the peso does have an impact on our results. The way to think about the currency impact is for every 5% movement in the dollar to peso, it's about a $4 million annual impact to our gross margin. If you look at our SAE expenses, it's about 12% of sales. It's a little bit higher than our range of kind of 11 to 12 percent but keep in mind in the current year we have about three and a half million dollars of one-time costs in the current year primarily related to the business transformation. As I look forward you know our expectation on gross profit is to be in the 18 to 20 percent range. We're close to that at 16.8 but we think there's levers to get us to the 18 to 20 percent and improve our margin profile of the business. This next slide just This summarizes our profitability metrics, so whether you look at it from a net income perspective, adjusted net income, or adjusted EBITDA, you see the significant improvement in the efforts of the team, kind of the results of the transformation. Through the first nine months, we generated 19.9 million of adjusted net income, or $4.83 per share. We have just over 4 million shares outstanding. And an adjusted EBITDA perspective, we generated 37 million of adjusted EBITDA through the first nine months of the year, which is just short of a 9% EBITDA margin. Next, if we look at our cash and liquidity, at the end of the third quarter, we had $107 million of cash on the balance sheet and only $1 million outstanding of debt. That relates to a separate revolver for our joint venture. We have a 51% owned joint venture. We also have a revolver, a $40 million revolver for the base business. We extended both of the maturities of both of those revolvers through 2028. Through the first nine months of the year, we've generated about $36 million of cash from operations, which is consistent with the prior year. And after the end of the quarter, we did buy back some of our stock. We bought back roughly $7.5 million worth of stock, which was about 2.5% of our outstanding When we think about the cash on the balance sheet and our capital allocation, I think we'll continue to be disciplined and balanced in our approach. Our primary focus is really the first two items on the slide here, which are more organic opportunities to continue to invest in the business. We have opportunities to invest in growth. Jen touched on some of those around innovation and new product introductions and customer programs. And the second is really about funding the transformation. So there's capital that we can invest in, some automation equipment, modernization of our systems, IT systems, and tools for our team. And then we've also had some restructuring costs in the past, and we'll continue to monitor and adjust our cost structure as we go forward. After we kind of address those first two priorities, we also look for other opportunities to drive shareholder value, and that could come in the form of M&A or returning capital to shareholders. From an M&A perspective, the big benefit from M&A would be to help us accelerate kind of the customer diversification and also add to our scale. And on returning capital to shareholders, we did announce a new buyback program, which is a $40 million buyback program. Kind of fundamental to our capital allocation priorities is kind of preserving our financial flexibility. We think that's about $50 million of cash, just given the cyclical industry that we operate in. And lastly, just to leave you with the Stratec investment rationale. If I was to summarize it, I'd say Stratec is still a transformation story. We're in the early innings of a transformation. We've got a new executive team, and half of our leadership team is new, and we're focused on a balanced approach of both cost reduction and growing the business, and we've got a very strong balance sheet to support us in those efforts. With that, I'll open it up for question and answer.

Speaker 9

It's cheap. I mean, it's come up in scans from before, but as you yourself kind of said, you're not, and unless, correct me if I'm wrong, you're not going to grow faster than the North American oil market has grown, and that's essentially not growing. And it seems that you've got most of your gross margin improvement accomplished. I think I saw 16 and a half, you're targeting 18. So, and you have an incredibly good balance sheet. But I ask myself, why would I buy this stock? You know, revenue goes down a little, goes up a little, maximum inflation. I could only think of one reason I'd buy this stock. Either if I thought a strategic buyer was going to come along and scoop you guys up, which maybe should happen by somebody in the sector, or if you put on a back dividend, which you can very easily afford to do. I mean, you could have a 4% to 5% yield covered 2 to 1 approximately by your EPS. If you want to get the stock up, I mean, have you thought about either the dividend or putting the company up for sale?

Matthew Pauli, CFO

Yeah, so I think...

Jennifer Slater, CEO

I think you just need to repeat it in a... Yeah.

Matthew Pauli, CFO

So I think the question was, have we thought about putting the company up for sale, or have we thought about reinstating the dividend? On reinstating the dividend, we have thought about reinstating the dividend. We've done some benchmarking, and for most companies that are in our industry, it's not common to have a dividend. So it's not being contemplated today. I think we think there's better options, as I mentioned, on the capital allocation to continue to invest in the business with the cash and then pursue M&A or return of shareholder capital via a buyback and will be opportunistic from a buyback perspective.

Jennifer Slater, CEO

And I think I'll just address your second question. You know, hopefully you see we're being measured because it's a long-cycle business that we're going to follow North America production. But we feel very confident that there's still a lot of growth that just hasn't been unlocked in this business. like the operational improvements that we've made. So the operational improvements that you've seen, those can be realized sooner than the longer-term revenue. So our focus is to drive as much value within this company as possible, but always make sure that we're considering everything from a shareholder perspective because we know we work for our shareholders, right? But we're very excited about the opportunities that exist in the growth standpoint. point we just know it's going to take longer term to unlock that revenue 18 to 20 what's next is to be able to communicate the growth what that looks like longer term so it's premature for us to talk about what that growth growth trajectory looks like because we're in the early stages of defining what that is nope for the next two years it is for sure because yeah sorry let me try to do a better job of explaining it because I don't think I explained it very well. So there's about 16 million vehicles that are made in North America today. I talked about the fact that our primary customers are Ford, GM, and Stellantis, and we don't have 100% a share of all the platforms that they make. I feel very confident that our products are relevant to do more with more customers and more platforms. So in the near term, because it's a long cycle business, we won't have that revenue growth because we missed the window for those platforms but what we are working on now is a broader penetration for our products and that's why i talked about that sales cycle so you had an idea of you know we're not talking the next two years we'll start seeing trends in 2029 is the earliest if we were working on a request for quote today when we would see that but more likely on a larger penetration in the market you know the five plus year cycle so it's yeah absolutely well it's not just locks it's the latches and the power access you know there's a lot of things that are going on in the in the north america supply chain uh domestic production is important uh it hasn't always been sourced that way so we have a north america footprint we have a strong technical team we're working on our cost structure and we feel that we can continue to be differentiated yeah Deb's asking me to talk about something that I'm not yet ready to talk about but I will talk about it because she put me on the spot what Deb's question was about our software capability across the platforms so if I go back to this slide if you remember I talked about our organization being relatively siloed our organization is siloed even in an engineering standpoint so the engineers that work on lock and key work on lock and key the engineers that work on power access work on power access latches and then we have a software department we have software in all of those products from a digital key standpoint on the software the next generation digital key fob why we are feeling very optimistic with where we're positioned is because as the electrical architecture in the vehicle changes, we've worked on the software that's compatible with the next generation electrical architecture. That same vehicle architecture, that next generation architecture is the same architecture that's used in power access and used in our latching components. What is difficult for our customers is they think about developing the software in the vehicle that's going to make your power lift gate or power tailgate repeatedly close is they don't understand the mechanics within the motor or the actuator or how the parts work. Well, we understand that. So when we develop the software, we're developing the software that works for our mechanical components in these positions that then seamlessly works with an electrical architecture, a common electrical architecture for all of those areas of the product. So I think, you know, I talked about the fact that we're rebranding, we're working on our vision, we're working on how we talk about our products with our employees to understand the value that we're unlocking so we're better articulating it to our customers. And Deb was just ahead of me on where we're talking about it with our investors um if if we were across all customers already i would agree with you right it's a it's a flat market the market isn't growing but we actually have only been a small subset of customers and that's why we're optimistic that there continues to be growth in the market yeah facilities so um our our equipment is still underutilized I would say that in our vertical integrated processes, so stamping, die cast, we have opportunity to unlock to be able to use more of that capacity for upside potential of 50%. If I think about injection molding, we're probably 60% to 70% utilized, so we've got upward momentum on our injection molding. On our assembly, that's where it becomes more important to think about the disruptive automation because if you were to look at the utilization of those lines, it would be very low because we built a line specific to a customer in a platform, so we have to rethink how we do the lines so we get more utilization, but that's not a large expense, assembly equipment.

Speaker 7

Increase content?

Jennifer Slater, CEO

Yeah, and I'm going to tell you it depends, because the question was, can you increase content on your existing platforms? There are some platforms that we have really high content, and there's other platforms where we have opportunity to cross-sell for these components and increase content. I would say that if you would ask me even up to a year ago, I would say that more platforms are going to have more power access. I think that there's a little bit of balance for the North America customers because they're figuring out how to manage their affordability levels. And in some cases with their affordability levels, they're looking at decontenting a little bit, going to a manual latch or something like that. That's not a place that we feel we can be the most competitive because those are more of a commodity and less of a technical solution. so it really depends on the customer and the platform to answer your question appropriately yeah yeah it's a two-part question part one is is there history of M&A in the company and do I personally have experience with M&A so the first part of the question is if you see our power access in motion where we've had a lot of growth we actually bought that out of bankruptcy through Delphi in 2008 so the company has a history of M&A I think Matt and I have both worked in different situations within auto that you know we've been part of integrations and part of M&A I think the other thing to think about is what we've done over the past two years in a transformation is we also know how to take businesses and continue to improve them but to your point this has been a lot of building the capabilities so for what we're doing do we have the right capability and if we went down a path of F&A the consideration of the employees and the skill set to do integration is the most important thing to your question yes Yeah. So the question is, yeah, the question is regarding the software comment that I wasn't ready to talk about that Deb asked me to talk about and the electrical architecture, how is that changing? What exactly is changing? So I'm going to caveat this by the mechanical engineer, not an electrical engineer for a reason. So if there are any electrical engineers, I apologize if I'm hacking this a bit. But, you know, most automotive companies are looking at how they can make their electrical architecture more efficient. So where they have multiple ECUs, they're looking at how do I condense ECUs. Where they have multiple wire harnesses, how do I make that more efficient? So that's kind of the next generation electrical architecture. specific on the key fob with the software right now key fob technology is LFRF and it's moving to ultra wideband technology and so our software development in the key fob not only meets the next generation electrical architecture but it also shifts from the traditional LFRF technology to ultra wideband technology yep yeah the the point was like Rivian and Volkswagen talked about a centralized electrical architecture, what I would say is every customer is approaching it in a unique way. So demonstrating that you can understand that and communicate with the software is an important capability as you think about continuing to build your products with multiple customers, that you've demonstrated that with a customer.

Speaker 4

Ethan?

Speaker 8

Are you making progress on getting five years out and being able to innovate and get your Yeah, Ethan asks, what's the progress that we're making on our future revenue pipeline?

Jennifer Slater, CEO

You know, we've talked a lot about modernization and building operation capability. How we think about our revenue pipeline is another point of what we're trying to modernize in this business because typically with a long cycle business, you're looking five to ten years out there always and you're understanding, okay, here's my target probability customers at maybe low probability. here's where i have medium confidence then you've got a historical win rate conversion rate that you can say okay with confidence i'm going to convert on that much revenue that didn't exist here so what we are doing is taking what where we know we've had success or building on the momentum that we've had to develop more maturity on that revenue pipeline and continue to engage as much as possible with those customers so i can give you a better answer at some point as we continue to modernize that on where we think we are with the future revenue. I'll give you one more customer example that I think is important. We've done a lot of work with Hyundai Kia. I talked about them being one of our customers. Right now we make a power sliding door mechanism that we ship to Korea that they put into Korea domestic vehicle production. While Hyundai Kia is an example of a customer that continues to win market share, we have a North America footprint. They're looking for North America suppliers. we already have the relationship, so we're understanding how we can support them. So that's a little bit of the thought process on how we're approaching this and how we're working on modernizing our pipeline as well for revenue growth.

Speaker 8

Are you making inroads with customers you don't already serve?

Jennifer Slater, CEO

The question is, are we making inroads with customers we don't already serve? Yeah, we've built a lot of capability in our sales team for experienced people who have worked in automotive and have a lot of connections, and that just takes time. so we've we've started but you know that's where I showed the sales cycle and where you really need to start with that and I think we are out of time so thank you very much