Conference Transcript - STRT 2026-08-27

Operator

All righty. Up next, we have Stratec Security Corp. They're traded on NASDAQ under STRT. Presenting on behalf of the company, we have Jennifer Slater, President and CEO.

Jennifer Slater, CEO

Thank you. Good morning, everybody. We'll start with the standard safe harbor statement that just covers any forward-looking statements that I may be making during the presentation today. For those of you who aren't familiar with Stratech, we've been a public company since 1995. We are about 89% institutional ownership with 4 million shares outstanding. On the right hand side, you can see we have a very diverse product portfolio, which I will spend a little bit more time talking about in subsequent slides. Our sales by customer is primarily trending towards the domestic Detroit customers. So 65% of our sales are with Ford, General Motors, and Stellantis. Our product sales are relatively balanced. We've got our headquarters in Milwaukee, Wisconsin, which I just said the drive with traffic yesterday was horrible. In our headquarters, We've got some sales, engineering, manufacturing. We've got stamping, die-cast, and plating capability. We have our commercial-facing location in Auburn Hills, Michigan, with sales, engineering, testing, and all of our development. And then we have four manufacturing facilities in Mexico, three in Juarez, one in Leone. In Juarez, we've got engineering, testing, light assembling, and some printed circuit board manufacturing, and then in Leon, we've got injection mold assembly and painting. Our Leon facility is part of our joint venture with ADAC, and then we've got distribution in El Paso, Texas for our customers. From a product perspective, our products are organized around three pillars. Permission, which is our traditional lock and key business. That's really where the company started. We also have our joint venture business under permission which is handles. From a technology standpoint we are working on next generation key fobs which is a digital key fob. There has been a lot of discussion on is our key fobs going away as you get more use with with your phone but what we found is from a security and a transferability standpoint consumers still want their key fobs. The difference is a key fob is changing from an RFID technology to an ultra-wideband technology that works with the next generation electrical vehicle architectures. The importance of that really is from a security standpoint and a consumer functionality. From our motion products, our motion products are primarily supporting all rear access for vehicles as well as power sliding doors. This is actuators that work with electrical, mechanical, and software to make sure the functionality from a consumer is there from an access standpoint for their vehicle. And then hold is latches. And this is from more manual latches in rear access and your hood latches to cinching latches that as you close your vehicle door, the latch actually helps close your door. I talked about our capabilities already, but this just shows the wide range of capabilities we have. One thing that isn't on this slide is our software capabilities. Like I said, our products are mechanical in nature and electrical, but we also have software that works across all of our products, which is a benefit to our customers as there are more complicated software architectures that are coming out in vehicles as vehicles continue to progress. So we've been under a transformation. I say this a lot. I'm a hockey fan. Deb, our IR person, tells me I have to talk about baseball, which is a little bit harder for me. Some days I feel like we're in a doubleheader. But I think this is really important to talk about because we really are still in the early stages of a transformation. You know, from a legacy standpoint, the business was not necessarily running from an operational standpoint that you would expect in the automotive industry. So there's been a lot of opportunity over the past two years that we've been able to capture, but there's a lot more opportunity in the business as we look at our margins. Where we want to be from a company standpoint is we want a more diverse set of customers. We want to continue to build scale, and we want a more stable and predictable business with greater customer diversification, if I didn't say that. I think it's important for those of you who may not be aware of the automotive industry to talk a little bit about it's a very long cycle business. Where Stratech had traditionally played with the customers was in the RFQ stage, which is in the middle of this slide here. That's really when a request for quote is coming to a supplier and you're responding to that, and then it's two to three years until that vehicle is launched. Because our products are so specialized and really to make sure that we're informed on our product portfolios, the best place for us to work is really in that early customer engagement. And we've been spending a lot of time in the organization to shift our focus earlier with our customers to make sure that we're providing the right technology that they need for their vehicles well ahead of an RFQ. We're doing that with the customers that we've traditionally supported, but we're also working on a broader set of customers in North America because while I talked about 65% is with Ford GM and Stellantis, that's a relatively smaller part of total North America production. So if you think about North America production and you look forward to our fiscal year 27, North America production is expected to decline by 2%. Our addressable customers are going to decline by 6%, but there's still a lot of opportunity for vehicles that are built in the market that our products apply to. And as more and more customers look at regional sourcing strategies, that's an opportunity for us as we think about organic growth. So I talked about the transformation. We've done a lot already, and there's still more to do. If our pillars, our strategic pillars really have been about making sure we have the right team and capabilities, driving our operational excellence, thinking about our value proposition, and modernizing our operations. From a team standpoint, we've injected new talent across the organization. We have a full new executive team. And what we're really now in process of is understanding where we may have capability gaps further down in the organization and making sure we have the right capability in the right places. Another opportunity for us is it was a very siloed organization. And what I mean by that is when I joined, I talked about where our footprint is. The leaders in those individual sites actually had never been together in the same room. So if you think about the opportunity to collaborate across the business, it's a huge opportunity for our leaders to get together to make sure we're aligned on the strategic pillars. And with that, we rebranded the company earlier this year, and we also rebranded our culture pillars to focus around innovation, collaboration, and accountability. From an operational excellence standpoint, we've reduced our headcount by 21% over the past two years. That realized $9.5 million of savings. We're continuing to look at where we have opportunities, specifically around automation. This past year, we focused on automation, simple automation. We automated 16 individual stations, but that only brings our automation level up to 9%. So we still have a tremendous opportunity in automation. From a value proposition standpoint, I talked about rebranding the company, but we also realized $15.6 million in pricing. Now, there is still pricing, but we got a lot of the larger low-hanging fruit, so we don't expect that the pricing opportunity will be as big going forward as it has been over the past two years. And then I talked about how important it is to build our customer diversification and upfront relationships. Modernizing our operations has been a big focus for us as well. You know, it says down on the bottom in process enhancing IT capabilities, we were very low IT tech when I started thinking about, you know, paper expense reports, signing up for benefits on paper. I'm happy to say that we now are automated for both of those things. But if you think about the efficiency of the business, we have so much opportunity there still to continue to modernize our operations. Our Milwaukee headquarters is about 350,000 square feet. We've got our salaried staff and we have operations. We're only using about half of that space. With where our process flow is, we've freed up about 91,000 of space in our Milwaukee headquarters already. And we're continuing to look at, you know, what is our right footprint for where we need to be longer term. So good work that's been done. Lots of opportunities still to come. Uh, from a financial perspective, I talked about net sales following automotive production. So in the quarter, we were relatively flat from prior year. Um, we did have 1.4 million of pricing benefits that was offset by program cancellations from electric vehicles, from our customers. We're really past that now, um, for the impact that we'll see from a year over year standpoint. From a gross margin standpoint, as I talked about, we have seen good improvement in our gross margin. Our gross margin expanded to 16.5% from 15% fiscal year 26 to fiscal year 25. That was really driven by $9.5 million in pricing. We've had the restructuring savings, and then the offset there was FX. We have seen pressure in FX specifically this year, and we are expecting a bit more pressure from a gross margin standpoint as we move into next year. Our SAE expenses increased $7 million to 11.9% of sales. $3.3 million of that was an increase in salaries and benefits. We had some incremental spend from business transformation, restructuring, and executive transition costs, and that was partially offset by half a million in restructuring savings and then recovery from those program EV cancellations. We really expect our SAE to be about 11 to 12% as we go forward. We're making sure that we're balancing in the investment that we need to facilitate the transformation with a focus on making sure we've got the right cost structure there as we move forward. From an earnings power standpoint, our net income grew 10% and it really validates the impact of the transformation actions ahead of some of the macro challenges that we've had with the negative FX impact of $4.8 million. And then our adjusted diluted EPS, which was the result in our pricing and a reduction in manufacturing costs grew from $538 to $688. We do have a very strong cash balance sheet. We've paid down all of our debt, and we have $108 million of cash on hand. So that leads to what are you doing with the cash? We've got very strong capital allocation priorities. The first one is to continue to invest in our organic growth that I talked about. The second is to fund our transformation. And then we recently released a $40 million buyback program, and last quarter we repurchased 110,000 shares for $7.4 million. We have M&A on here because it is an important part as we think about the balance of our organic growth and our inorganic growth, making sure that we're thinking about the value we provide to our shareholders. Our priorities in M&A, we started talking about this last December. And, you know, we really think about helping us go faster with our customer concentration, as well as building scale in the business. And while you can develop a strong pipeline for M&A, sometimes something comes at you quicker than you would expect. And so we wanted to make sure that we have had the right framework for M&A. We've been active in this space, but we're also balanced in making sure we, if we were to do something, that we would have a strong execution plan knowing how much of the transformation we still have left to do in the core business. So what's the investment rationale for Stratech? You know, we've had a strong track record for margin expansion, and that's been demonstrated through the transformation. We've really focused on rebranding our company as well as rebranding our culture pillars for our employees. our employees are the most important part of our future. We've been doing a lot with our business modernization, right sizing, and our process improvements. We've continued to inject new talent in the business to drive the transformational change. And we've got a very robust balance sheet and strong cash generation. I think I forgot to say, you know, we are looking at about $10 million of cash generation a quarter here as we're thinking about going forward. And that's what we've been demonstrating in the prior year. There's been some one-time cash as we've done some cleanup, but we feel $10 million a quarter is the right number for us as future cash flow generation. And with that, any questions? Sure. Okay. What is my background is the question. So I like to tell people I've worked 8,000 years in automotive because it's like dog years if you've worked in automotive. My whole career has been in automotive. I'm a mechanical engineer by degree. I spent several years in finance. I finally escaped finance after eight years. I've done sales strategy. So I've always worked in much larger organizations. So my past two jobs, I was running $3 billion businesses. So this has given me a very good appreciation that just because it's a smaller business doesn't mean it's an easier business. We're in the, so the question is, where is our labor force? So our Milwaukee labor force is United Steelworkers. We just negotiated a contract late last year for the next three years. Our Mexico labor is not unionized in Juarez. Our Leon salary force, or sorry, labor force is union. that contract gets renegotiated every year. Yeah. Yeah, the question is how are we thinking about our footprint in Milwaukee? I like to tell people that my office looks like an episode of Mad Men. There is opportunity. We want to make sure that obviously there's a big part of the culture change here. Our manufacturing, we're very committed to keeping in the site that we're in today. You know, we're, our consideration is most likely with the sale leaseback of the building. So we can utilize the space that we have for manufacturing. We're in consideration of moving the, our salaried staff, but we would stay in, in the Milwaukee area. Yep. Yeah. Yeah. The question was about our competition and who we compete with. We actually have a pretty diverse set of competitors, depending on how you think about where our product segments are. In our permission and our lock and key business, it's larger players like Amovio, Valio. Hoof is a competitor in this space. In our motion and our hold business, it's Broza, it's Magna. So, you know, there is quite a bit of competition across our segments where we really differentiate ourselves and how we win is with our technology and our engineers and our understanding of how that technology fits in the vehicle. Yeah. Yeah. This is a story Deb's going to make me tell, I'm sure. So right now we do have some business with Hyundai Kia. We actually manufacture a power sliding door in our Mexico facility. We ship it to Korea. They put it in their vehicles for Korea production. Myself and the commercial, our chief commercial officer went over to Hyundai Kia to meet with them and talk about opportunities. And they asked me why we haven't been supporting them in North America. I'm like, well, that's what we would like to do. You know, so there's more lower low hanging fruit there that we have a relationship already. And it's just how do we support them? And that's a great customer that's growing market share in this region. For other customers, there's been a real shift for region-to-region supply chains. You know, if you look 10 years ago, the customers were looking at releasing global platforms that were made by the same suppliers in every region. With supply chain challenges, tariffs, everything else that has happened really since the time of COVID, a lot of the customers are re-looking at their strategy looking for opportunities to have more region supply chain which is a great opportunity for us and then it just comes to how long can you realize that opportunity and that's where it is going to take us time because our team is now engaging with a broader set of customers letting them know our capabilities our products but we're out there in that five plus years to launch, developing those early relationships? Yeah, the team? Yeah, so it's really a great question. And, you know, what I would have expected when I came into this business is a lot of pushback because as I've seen different companies and when there's change like that, the organization is definitely pushing back. This organization and team, we've got a great team and there's a really good culture. Now, you're always going to have pockets, right? I would say, you know, for our labor in Milwaukee, it's been hard for them to understand how important they are. And, you know, there's always the rumors of, okay, well, we're consolidating equipment. So are we leaving Milwaukee? So I'm glad you asked that question because we are committed to staying in Milwaukee. But it's been a really impressive workforce to me to get behind understanding that they need the transformation and there's excitement about where we're going in the future. Yeah. Yeah. Yeah. I think that if there is a customer that's looking for, let's say, a change in supply because of regional focus, right, and tariffs and everything that's happening, we're ready to react faster. The majority of our growth, though, will be a longer time as we're thinking about it organically. But we'll take anything we can get, and our teams will move fast. So, yes. Yeah, thank you. It's a great question. So I was really disappointed because when I started, tariffs were such a big deal, and we came to an investor conference, and that's all we talked about, and the team did a great job. We're 95% USMCA compliant. And so as we worked through that, when we came to the next investor conference, no one wanted to talk about it. But to your point, there's been a lot of moving pieces, and we're staying very engaged in understanding how that would impact us. A lot of it's with regional value content, and if there's going to be increases on regional value content to have your USMCA status. So we are working through what that would mean to our supply base. We're working very closely with our customers. Our customers have really told us, you know, don't make too big of pivots. You know, make the right decisions for what is good for your product longer term. But we're not getting a pull from our customers to say do something dramatically different because there's a lot of moving pieces. But we're staying very close and on top of it just because of where our footprint is. It's the other great thing that I like about having so much space in Milwaukee. Our capital is not super intensive without a lot of infrastructure, so we do have the ability to make footprint moves if we had to do that as well. But obviously, you know, it's really just getting ahead of it and making sure we're prepared and staying close to the ever-changing landscape of what's happening in the tariff environment. Well, thank you guys. Oh, one more question.

Operator

I'm pretty worried to be right there.

Jennifer Slater, CEO

Yeah. So our prior share buyback program was 30 years old. So the good thing is we've now reinstituted a new share buyback, like I said, of $40 million. Our focus on that really is one, to offset dilution, and two, to be opportunistic. We are subject to blackout windows from that opportunistic buy. So like Deb said earlier, we would have bought back yesterday um as our earnings came out but there are some blackout windows so we're just going to stay um obviously vigilant and if we see there's value there that there's a big disconnect we will be opportunistic with our share buyback yeah thank you for the question well thank you for listening about strat tech everybody and i hope you have a great day