Craig Gates - President and CEO Ron Klawitter - Chief Financial Officer

Matt Dhane - Tieton Capital Jeff Mash - Morgan Stanley Anya Shelekhin - Sidoti George Melas - MKH Management

Good day, ladies and gentlemen. And welcome to the Key Tronic Corporation Fourth Quarter and Year End Earnings Call. At this time, all participants will be in a listen-only mode. Later, there will be chance to ask questions and instructions will be given at that time. (Operator Instructions) And as a reminder, today’s conference is being recorded. And now, I would like to turn it over to your host, Craig Gates.

Good afternoon, everyone. I’m Craig Gates, President and Chief Executive Officer of Key Tronic. I’d like to thank everyone for joining us today for our investor conference call. Joining me here in our Spokane Valley headquarters is Ron Klawitter, our Chief Financial Officer. Today, we released our results for the fourth quarter and year end of fiscal 2013. Despite a challenging second half, we increased our annual revenue and profitability, expanded our customer base, maintained strong operating efficiencies and significantly strengthen our balance sheet. We set a new company record for annual revenue of $361 million, driven by an increasingly diverse mix of new customer programs. By the end of fiscal 2013, we were generating revenue from 183 separate programs and had 56 distinct customers, up from 165 programs and 48 customers a year ago. After very strong revenue growth in the first of fiscal 2013, second half was primarily impacted by an anticipated slowdown from a large customer. Despite the challenges associated with the second half slowdown and with many new program ramps and product mix changes, we continue to focus on optimizing our production processes, supply chains and customer product designs. As a result, our annual gross margin increased to nearly 10% and our operating margin to 5%, and our net income was a record of $12.6 million, or $1.15 per diluted share, up 8% from the previous year. At the same time, we generated over $25 million in cash flow, which allowed us to fully payoff our bank debt and finish the year with nearly $11 million in cash. During the year, we also continued to extend our customer portfolio across the wide range of industries winning new programs in solar energy, power management, power supply, RFID, exercise, security, LED lighting, commercial washroom, automotive and off road vehicle equipment. Our success in winning new business continued to be driven by our unique combination of world-class engineering and global footprint, and by the competitive advantages that result from our vertical integration and expanding production capabilities in Mexico and China. Now I’d like to turn the call over to Ron to review our financial performance, then I will come back to discuss our strategy as we move into fiscal 2014. Ron?

Thanks Craig. 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, quarterly 10-Qs and 8-Ks. 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 and a recorded version of this call will be available on our website. For the quarter ended June 29, 2013, we reported total revenue of $84.6 million, compared to $96.7 million in the same period of fiscal 2012. For the full year of fiscal 2013, total revenue was $361 million, up 4% from the $346.5 million for fiscal 2012. Despite the fact that we have been moving many new programs into production, we have continued to maintain our strong gross margin. Our gross margin was approximately 9% in the fourth quarter of 2013, which is comparable to recent quarters and in line with our target. Our total operating expenses were $4.2 million in the fourth quarter of fiscal 2013. This is up about 5% from the fourth quarter of the last fiscal year. This reflects many of our new program startups which required the addition of technical and program management support. Our operating margin was 4% in the fourth quarter of 2013. This is down from 5% in the same period of fiscal 2012. The full year of fiscal 2013, however, operating margin was 5%, which is up from 4% for fiscal 2012. Despite our solid operating efficiencies, our lower revenue did have an impact on our bottom line in the fourth quarter. Net income for the fourth quarter of fiscal 2013 was $2.4 million or $0.22 per share, compared to $3.8 million or $0.35 a share for the same period of fiscal 2012. For the full year of fiscal 2013, net income was $12.6 million or $1.15 per share. This is up 8% from $11.6 million or $1.10 per share for the same period of fiscal 2012. Turning to the balance sheet, we have significantly strengthened our financial position even as our second half growth slowed down. Our inventory was down $13.8 million or 24% from the end of fiscal 2012, which reflects our planned reductions and improved inventory management. We've also reduced the balance of our bank line of credit to zero, which is a reduction of around $15 million from the end of fiscal 2012 and also our cash position was $10.8 million at the end of 2013, which is up from just a $0.5 million at the end of 2012. In short, we generated over $25 million in positive cash flow during the fiscal year. Our trade receivables were $47 million at the end of the fourth quarter and our day sales outstanding were about 47 days which is comparable to previous quarters. Our capital expenditures for fiscal 2013 were approximately $3.5 million and we expect our CapEx to be about $5 million in fiscal 2014. Moving into the first quarter of fiscal 2014, we anticipate more of our new customer programs moving into production and gradually ramping up. At the same time, we anticipate lower overall revenue as a result of the continued slowdown in demand from the same customer that began to reduce its production levels in the second quarter. In addition, we are currently seeing a significant reduction in orders from another large customer and a few of our new programs are not ramping up as rapidly as anticipated. Taking these factors into consideration, we anticipate that the first quarter of fiscal 2014 will have revenue in the range of $73 million to $78 million. In the first quarter, we expect our gross margin to remain around 9%. We also expect our operating expenses to remain relatively flat in coming periods. Taking these factors into consideration, we expect earnings in the range of $0.15 to $0.20 per share for the first quarter of fiscal 2014. This expected earnings range assumes an effective tax rate of 30%. In summary, while we expect our first quarter results to be lower than recent quarters, most of our new customer programs continue to steadily ramp up. And we expect to see renewed sequential growth during the second quarter. Overall, the financial health of the company is excellent and we believe that we are well positioned to continue to profitably expand our business over the longer term. Okay. That’s it for me. Craig?

All right. Thanks, Ron. Moving into fiscal 2014, we continue to believe our fundamental strategy remains sound. As we've discussed before, there are three major competitive advantages behind our continued success. First, increasing cost in China are driving demand for more localized production, Mexico for North America end users and China for Asian end users. Among EMS providers, we stand alone in the excellence and breadth of our Mexican operations. As more previously outsource manufacturing business moves back from China, we expect to continue to benefit. Second, our unique organizational structure, which we have owned over years of experience in running offshore operations bring significant advantages to OEMs. Our growing portfolio of customers increasingly want offshore cost savings yet they fear the IP loss, fear offshore schedule risk and inventory uncertainty, and do not want to manage an offshore relationship. And they want U.S. base engineering and prototyping. While we'll sometimes be competing against our customers’ in-house factories, we believe that beyond the level of cost and service we can provide for our Mexican facilities. We offer an exceptional level of experience with the process of competing with an in-house model. Third, our size and responsiveness compared to our degree of vertical integration and engineering capabilities become even more attractive as the push for localized production intensifies. To this end, we recently purchased the assets of Sabre manufacturing. It operates a sheet metal -- sheet metal fabrication facility near our campus in Juarez, Mexico. Sabre enables us to offer metal -- metal fabrication directly to our customers in combination with our plastic molding, PCB assembly, complete product assembly, design engineering and test engineering services. This acquisition furthers our strategic focus on providing all the EMS services available from a much larger company and still bringing flexibility and high customer service levels that our clients demand from us. We have already seen significant interest in our expanded capabilities across our combined customer base. Our periodic fluctuations in large customer demand, mixed changes in our program portfolio and cost associated with ramping up new programs will continue to be a part of our business. We believe our fundamental strategy remains sound. And our sustained focus on controlling cost, augmenting production processes, and enhancing our capabilities will continue to result in profitable growth and competitive advantage. We see more of our new customer programs moving into production and gradually ramping up and our pipeline of new business opportunities remains robust. Over the longer term, EMS market is expected to see steady growth. And we believe Key Tronic is increasingly well positioned to continue to capture market share and capitalize on emerging opportunities. Finally, I want to take this opportunity to express my gratitude to our employees for their dedication and hard work during this past year, to our valued customers who continue to honor us with their trust and to our shareholders for their continuing support. This concludes the formal portion of our presentation. Ron and I will now be pleased to answer your questions.

(Operator Instructions) We’ll take our first question from Matt Dhane from Tieton Capital. Please go ahead, Matt. Matt Dhane - Tieton Capital: I was curious of the four new customers win that you had here Q4 what’s the size range of those revenues once they ramp?

They are anywhere from $5 million to $25 million. Matt Dhane - Tieton Capital: Another question I had is, I was curious, what’s led to some of your new programs not ramping as rapidly as you’ve anticipated?

Well, it’s kind of a common litany of problems that we’ve talked about a number of times in the past. A couple of these programs have had design issues, where the customers had to go back and redesign the product. One of the programs has had availability issue of some components. So it’s pretty much the typical stuff. And I guess the other one that I can think of is had a little bit of demand slow compared to what they thought when we won the program. Matt Dhane - Tieton Capital: Okay.

To get at maybe the unasked question is is any of this Key Tronic problem and other than the fact that is going slower than we want, none of this is caused by Key Tronic capabilities or failings. Matt Dhane - Tieton Capital: Good to hear. My final question, I have for now is what leads to your confidence that you’re going to see a renewed sequential revenue growth in the Q2 of fiscal ‘14?

Well we’re looking at the forecast from our current customers; we’re looking at the speed at which we’re ramping certain customers up. And we’re accounting on all of our customers to be reasonably close on what you're telling us for their forecasts. But that's what we look at to say what our next quarter is going to come in at. Matt Dhane - Tieton Capital: And the forecast all do seem reasonable from your perspective?

Yeah. They do. Matt Dhane - Tieton Capital: Great. Thanks.

Yeah.

Thank you. And we’ll take our next question from Jeff Mash from Morgan Stanley. So Jeff, please go ahead. Jeff Mash - Morgan Stanley: Hi. You may have touched on this little bit with the last question. But I’m just trying to better understand why some of these larger customers have been cutting back on orders?

The biggest -- by far the biggest problem has been a customer that was over 30% of our revenue about three quarters ago and it's pretty clear to us that they were a bit confused on their actual demand and had ordered a lot more parts than what they needed. So in essence they're burning through inventory that we've built for them over the last two and half, three quarters. Jeff Mash - Morgan Stanley: About the second customer?

Second customer is much smaller percentage effect on our revenue and that is simply a matter of their market and their forecasting abilities. Jeff Mash - Morgan Stanley: Thanks.

Yeah.

Okay. And we’ll take our next question coming from Anya Shelekhin from Sidoti. So please go ahead with your question. Anya Shelekhin - Sidoti: Hi. I have a couple of questions. So first of all, the second customer, would you be able to give a percentage of revenues for this quarter they accounted for?

I’d have to guess that is probably...

I can tell you what they were last year.

Yeah. Anya Shelekhin - Sidoti: Okay.

That customer last year was just under 20% of our revenue. Anya Shelekhin - Sidoti: Okay. And for your largest customer, would you be able to give what percent of revenue they were this quarter?

Yeah. They were approximately right about 20%, little bit under 20%. Anya Shelekhin - Sidoti: Okay. What are your expectations for sales from these two customers going forward, specifically the largest one, do you think demand will continue to slow down or has it -- or stabilized, do you think it will stabilize?

We think that they’ve hit the bottom and we think they are about burn through their inventory, so we expect, we’re forecasting them as if they’re flat. We’re hoping the reasonable level of trust in our hope that’s they are going to start to pick back up again. Anya Shelekhin - Sidoti: And when do you think they will start to pick back up?

We are hoping after somewhere towards the end of Q2. Anya Shelekhin - Sidoti: Okay. And what about the second largest customer, what are your expectations for their demands going forward?

We don’t really know for sure. Anya Shelekhin - Sidoti: Okay.

And both of these were -- these are our best guesses, we’re not sure what’s going to happen, because we’re two orders away from, I mean we’re two levels away from the end customer. Anya Shelekhin - Sidoti: Okay. And what are some of the near-term trends that you’re seeing in the EMS market at the moment?

Well, the biggest one is the continual flight from China to Mexico. The costs in China are narrowing the window through which China production can sneak and still be cost competitive with Mexican production for North American consumption. That’s the overarching trend that’s powering a lot of this for many of our competitors, our customers and ourselves. Anya Shelekhin - Sidoti: Okay. That’s all for me. Thanks.

You bet.

Okay. And our next question is from Matt Dhane from Tieton Capital. Matt, please go ahead. Matt Dhane - Tieton Capital: Thanks. I wanted to hit on the Sabre acquisition a little bit, if I could. I was curious have you folks at this point in time seen additional business already flow in due to the acquisition both from business that Sabre was working on and now they’re working with you, or looking to work with you, as well as, obviously, I guess, that the primary reason why you folks acquired it, but business that you are currently working on and you’ve added now the piece that Sabre can do for you.

So there are two sides to that answer and both of those sides are good. From the Sabre customer base, we were hoping that, but we didn’t count on it, but we’re hoping that there were some pent-up demand for a broad service EMS supplier amongst the customers who were buying just steel from Sabre and that indeed has turned out to be the case. And on the other side of that answer in terms of our customers and prospective customers and customers who would not have even have talked to us if we did not have steel capabilities, the response there has been excellent and we’ve already had some significant program wins on that side of the story too. Matt Dhane - Tieton Capital: And although it’s still early Craig, is it exceeded your expectation?

Yeah. It’s actually better than we’d hoped for particularly on the pent-up demand side from the Sabre customers and from the customers that we didn’t know about who now are taking a look at us and giving us quoting opportunities. The piece of the equation that we had counted on was our current customers who we had hoped would give us more programs based upon our ability to make our own steel, so that part is working, as well as we thought. And then these other two portions of it, pent-up demand from Sabre’s customers and new customers that we didn’t know of, those two portions are working much better than we thought.

It’s really interesting is we’ve even had one of our competitors in the EMS industry come to us for to have us “doing some sheet metal work” for them, even though they know we’re a competitor, the ability to find good quality sheet metal in Mexico is hard and so just opportunities within our own industry of outsourcing some of their business to us is interesting. Matt Dhane - Tieton Capital: Yeah. Surprising indeed. My second question around Sabre is you, obviously, you called out that you expected to be accretive? Can you give us a sense of how accretive you would expect that to be and that’s immediately accretive, correct?

Yeah. It’s, I mean, it’s not going to be a big number, maybe $0.01 to $0.02 a share in this current quarter. Matt Dhane - Tieton Capital: Oh! Quarterly.

Yeah. Matt Dhane - Tieton Capital: Okay. Nice. Yeah. My final question I have for you guys is the robust new business pipeline. Is there any changes really in the types of opportunities you’re seeing, I know in the past you said you’re trying to see larger opportunities, what further color can you add upon that, what’s developed or this last quarter with some of the larger opportunities?

Well, as we talked about just a minute ago, the Sabre capability has added to the size of the opportunities we’re seeing, not only in the number, but also in the program size. So we’re looking at a number of programs that are up at the top end of the numbers we normally see in the $20 million to $50 million range, and a chunk of those are based on having metal capability. Matt Dhane - Tieton Capital: Okay. And so some of these opportunities were opportunities that were in your pipeline and now the fact that you have the metal opportunity that’s made me even a better or more ideal candidate really for you folks potentially?

That’s part of it and another part of it is some of these opportunities were not even in our pipeline because they were talking to us because we didn’t have metals. Matt Dhane - Tieton Capital: Okay. Okay. That’s helpful. Thank you, guys.

Yeah.

Thank you. And we will take our next question from George Melas from MKH Management. Please go ahead, George. George Melas - MKH Management: Good afternoon. A quick -- a quick clarification on your largest customer, you said it was 20% of revenue. I think you meant for the year not for the quarter, is that correct?

No, it was for both. There were about 20% -- but little bit less than 20% for the year -- less than 20% for the year and for the quarter, they were a little bit less than 20% like around 18%. George Melas - MKH Management: Okay. As their peak, they had run over 30% per quarter?

Right. George Melas - MKH Management: Okay. And you still producing for them primarily Mexico but also enjoying as well, is that right?

Yeah. George Melas - MKH Management: Okay. A question on the customer account, you added four customers this quarter, I believe in four last quarter, but the way you reported your customer it was flat this quarter. So that suggests that you lost a few customers? Is that correct or is that just very small customers that does not have an impact or have you had some significant customer exits?

These have not been any significant customer losses. In fact, they were all divorces that were initiated by Key Tronic. So these are small customers that we won some time ago. And we quoted much higher volumes that what became clear we’re ever going to materialize. And so we agreed with the customers they should go find a much smaller contract manufacturer and we would help them leave. So you can call that pruning or whatever, in other words you want put to it, but that's what it was. George Melas - MKH Management: Okay. Very good. That’s very good to know. And in terms of the model, you were very efficient on the OpEx wrapping up, and also of course on the GM -- on the gross margin that that increased significantly. It seems like your GM is able to, despite the revenue loss -- the lower revenue, if you are able to have still very good gross margins, but you can quite flex down the OpEx. It seems like the OpEx once its there, is very hard to take it away, is that right?

No. That’s wrong. So, if we didn’t see growth in our future, it would be easy for us to cut our OpEx but we continue to spend on OpEx because it takes people and therefore salaries to bring the new customers on board. So what we’re spending today on program managers, on engineering, on coding, on process engineering, we won’t see and you won’t see the benefits of that for anywhere from 9 to 12 months. So if we wanted to say, we’re just going to stay flat, we could let go a lot of people, hack our expenses down to a lot less than it is now and show probably the year or two years of really fantastic margins but then we would be mortgaging our future. George Melas - MKH Management: Okay. Great. I am glad to hear that. And just one more question on the variability of margin by customers. So of course, you look at customers and as you say you divorced, you call some of them. Is there in your portfolio of customers a great deal of variability in terms of margins and does that mean you may call some more?

There is indeed a huge variability in our portfolio of customers, programs and margins. And we may call some more at the very low end of revenue. As far as mid and high-term revenue goes, we don’t anticipate any calling to go on there. George Melas - MKH Management: Okay. Very good. Thank you very much.

You bet.

(Operator Instructions) Okay. At this time, ladies and gentlemen this does conclude our Q&A session. I’d now like to turn it back to the hosts for any concluding remarks.

Okay, everyone. Thank you again for participating in today's conference call. Ron and I look forward to speaking with you again next quarter. Thanks and have a good day.

Ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.