Brett Larsen - CFO Craig Gates - President and CEO.

Bill Dezellem - Tieton Capital George Melas - MKH Management Sheldon Grodsky - Grodsky Associates.

Good day and welcome to the Key Tronic Second Quarter of Fiscal 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brett Larsen. Please go ahead..

Good afternoon, everyone. I am Brett Larsen, 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 the Spokane Valley headquarters is Craig Gates, our President and Chief Executive Officer.

As always, I would like to remind you that during this course -- 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. Today, we released our results for the second quarter ended December 30, 2017.

For the second quarter of fiscal 2018, we reported total revenue of $111.7 million, compared to $118.5 million in the same period of fiscal year 2017. For the first six months of fiscal year 2018, total revenue was $220.9 million, compared to $235.7 million in the same period of fiscal 2017.

For the second quarter of fiscal 2018, gross margin was 7.9% and operating margin was 1.5%, compared to 8.1% and 2.1%, respectively, in the same period of fiscal 2017. Our gross margins continue to be adversely impacted by decreasing demand of existing customers, coupled with the ramp up costs associated with new program wins.

Some of which have ramped slower than previously anticipated. Many of these new programs involve transferring ongoing production from the competitors EMS facility to our own, which has exacerbated the length of time it has taken to get the full production volumes.

We expect to see gradually improving gross margins as these new programs move into full production, further utilizing existing production capacity. In addition, we're taking steps to streamline our operations and reduce costs in Mexico.

As we expect the recently won, new programs will fit into existing production equipment capacity and require less labor content. As a result of these efforts, we expect the total cost in Mexico will be reduced by approximately 9% by the fourth quarter and beyond.

Our China facility continues to be profitable, supporting current programs and provides a competitive manufacturing option in Asia for locally sourced programs. Moreover, our U.S. facilities are proving to be increasingly profitable and we expect to see further growth in these locations. The U.S.

corporate tax reform in December 2017 significantly impacted our GAAP results for the second quarter of 2018. We had a discrete charge for un-repatriated overseas earnings and a write-down of certain deferred tax assets related to U.S. tax reform and a foreign exchange adjustment totaling $1.1 million or $0.10 per share during the quarter.

As a result of these tax charges, in the second quarter, we like many other companies had a net loss. In our case, we reported net loss of approximately $200,000 or $0.02 per share.

Excluding these discreet tax adjustments, net income would have been approximately $0.9 million or $0.08 per share compared to net income of $1.5 million or $0.14 per share for the second quarter of fiscal 2017.

For the first six months of fiscal 2018, net income was $0.2 million or $0.02 per share compared to net of 3.3 million or $0.30 per share for the same period of fiscal 2017.

Excluding the impact of the discrete tax adjustments that occurred during the second quarter, net income for the first six months of fiscal 2018 would have been approximately 1.3 million or $0.12 per share. In coming quarters, we expect to benefit from the tax reform through a reduction in our estimated effective tax rate going from 25% to 20%.

Turning to the balance sheet, we continue to maintain a strong financial position as a result of ramping new programs and unanticipated delays in shipments during the second quarter. Our inventory increased approximately 3% from the previous quarter and our trade receivables at the end of the second quarter were also up 3% from the previous quarter.

However, through managing payables during the second quarter, we reduced our debt by $3.8 million compared to the prior quarter. Over the longer term, we expect to continue to pay down the term loans and the revolving line of credit at a similar rate.

Note that our inventory and receivable levels in recent quarters have included roughly $10 million of purchase and paid inventory and receivables do from a former customer, which is expected to be resolved by a binding arbitration hearing schedule to occur during the third quarter.

In addition to the inventory at issues in the arbitration, we are pursuing reimbursement for certain cancellation fees and other carrying products already expensed but believed to be contractually do from the formal customer. We have not accrued for any outcomes related to this claim, which could result in a one-time gain or loss.

Legal costs are being expensed as incurred. The ultimate disposition of this matter in any gains or losses, are unknown and could have a material effect on the consolidated financial position, results of operations and cash flows.

Irrespective of the outcome of the arbitration, we expect to see our net inventory levels gradually come more in line with revenue levels as shipment delays are reduced and eliminated, and new program ramps continuing in coming periods. We expect our consolidated DSOs to remain around 40 days.

Total capital expenditures through the second quarter of fiscal 2018 were approximately $2.2 million and we expect CapEx for the full year to be approximately $7 million. We continue to invest in our SMT, sheet metal, and plastic molding capabilities, but at a more moderated level than our investments in recent years.

Moving into the third quarter of fiscal 2018, we expect more of our new customer programs to ramp and to move into production. We continue to expect softness among a few of our longstanding customers.

Taking these factors into consideration, we anticipate that the third quarter of fiscal 2018 will have revenue in the range of a $110 million to $115 million.

During the third quarter, we anticipate charges of approximately $0.7 million for legal expenses in connection with the binding arbitration hearing related to the paid inventory and receivables due from a former customer.

Furthermore, we've also been incurring approximately $0.5 million for severance cost related to streamlining our facilities in Mexico. Taking these factors just mentioned into consideration, we anticipate earnings in the range of the breakeven to $0.05 per share for the third quarter. This expected earnings range assumes an effective rate of 20%.

In summary, we're encouraged by the prospects for future growth in revenue and earnings. We also look forward to resolution in the schedule upcoming arbitration.

The overall financial health of the Company is strong and we believe that we are well positioned to win new EMS programs and to continue to profitably expand our business over the longer term. That's it from me, Craig..

Okay, thanks Brett. While we've had recent softness among a few longstanding customers and some unanticipated delays with new customers, our new programs are gradually moving forward, contributing more to overall revenue and we expect new programs we have won to contribute to higher revenue in the fourth quarter of fiscal 2018.

During the second quarter, we continued to win significant new business from EMS competitors including two new programs involving products for new and established customers involving the Internet of Things devices for consumers and commercial applications.

The details of the manufacturing ramp discussed last quarter relating to a consumer security product are still yet to be finalized. Moving into the third quarter we continue to see a strong pipeline of potential new business.

We're extremely pleased to see continued strong results from Key Tronic East, which you'll recall was acquired over two years ago after closing our Hertzberg, Kentucky facility and trimming non-profitable programs during this year, we're seeing steady growth in revenue and increased profitability from the east.

We believe that this reflects a growing appetite for U.S. built products and a significant value of having highly efficient domestic production facilities. At the same time while we are carefully managing our expenses, our investments in S&P sheet metal and plastic molding capabilities in both Mexico and the U.S.

are expected to enable planned future growth. Moving further into fiscal 2018, we continue to see a strong pipeline of potential new business opportunities. While there continues to be uncertainty in our market, companies continue to award programs to new suppliers.

We have several new customers that have moved business to us, but it often takes time to transfer meaningful revenue from supplier to supplier.

As a result, we are already incurred the expense of quoting, winning and transferring new business in their facilities while not yet enjoying the margins that will come as the customers complete transition to us.

Going forward, our broader and more diversified customer base significantly lowers the potential risk and impact of a slowdown by any one customer.

Moreover, Key Tronic is well positioned for the returning tide of North American based customers as they correctly analyze the total cost for overseas production push production in both Mexico and the U.S.

Our steady pipeline of new business opportunities continues to be boosted by our unmatched level of vertical integration, our multi-country footprint and the excellence of our manufacturing sites in comparison to other EMS competitors of our size.

As OEMs face an increasingly in certain geopolitical landscape, Key Tronic is uniquely equipped to offer risk mitigation with our manufacturing facilities located in China, Mexico and the U.S.

Moving in the third quarter, we expect to see many of our new programs continue to ramp up and continue to on-boarding of several new customers and a strong pipeline of potential new business. By the fourth quarter of fiscal 2018, we anticipate growth and revenue in improving margins.

Over the long-term, we believe our new programs and customers will continue to grow far beyond the revenue levels today with our increased capacity and strong operations potential to accommodate a more diversified customer base. Overall, we remain optimistic about our growth opportunities and our competitive strengths.

This concludes the formal portion of our presentation. Brett and I will now be pleased to answer your questions..

Thank you. [Operator Instructions] And we'll take our first question from Bill Dezellem with Tieton Capital..

Let's start with my normal question.

What's the size of the -- range of size of the wins that you had here this quarter?.

First one is 5 to 15 and the second one is very large..

How does one divide or act very large into the equation -- do you have range you'd like to give?.

Nope, I'd like to see this thing get a little bit more fully transferred and us understand the ramp and make sure we understand the full potential before I commit to a number..

So, that's maybe a good lead into another question that, that we had.

Is that in relation to last quarter's earnings report? You did make reference to a prospective client that if they happened, could have an impact on the December quarter results, and if that was the case that you would alert everyone to that happening?.

Yes..

We didn't see a press release that indicated that that had been formalized, nor did the results this quarter looked like you had a lot of revenue from that prospective customer.

Would you talk about kind of the update with that customer or prospective customer? And if it's even still alive and if it is still alive, where is that in the whole process?.

Sure, as we said in the press release, a quarter ago, we have signed an MSA with that customer. And as it stands today, we're in the midst of transferring their supply chain from the incumbent supplier to ourselves. We're transferring that supply chain in the midst of a significant ramp in volume.

So, it's as always complex to get all the players on the right page to get figured out who's at what PO with which supplier, and figure out which supplier has shipped what stuff to which of us. So, it's a work in progress, but the forecast in terms of revenue and our excitement about the program has not diminished in any way.

It is a case like always of getting the supply chain transferred and getting the trial knowledge transfer is a lot of work..

So that answer is the question of whether since we didn’t hear anything that, that customer disappear, the answer is definitely not, that customer is very much alive then..

Yes..

And is that customer one of the two that you referenced, that you had one this quarter?.

Craig Gates:.

Okay.

So that kind of answers the question of why you’re not really wanting to put a real specific number on it, it’s a little bit lose at this point?.

Right..

When do you think, you’ll know more information just about those variables that are completing [indiscernible]?.

As you can imagine, we’ve been very, very frustrated and very intently focused on making this happen. As quickly as we can, we’re making share we’re not putting ourselves at risk and it’s turned into outstanding joke here. We look at each other every day and we say, we’re closer than we’ve ever been.

So I can't tell you when for sure we’re going to go into production. I think we’ll be into production in a couple of weeks, but I have thought that any kind of last two months..

So, if you will allow me to paraphrase what I think I just heard you say, is that, that everything is moving forward is just that, you have felt like that you’ve been burned to some degree and when you’re guessing, when this is going to ramp. And as a result, you’re just being quite cautious at this point.

Even though, it’s large and everything looks like it to go..

Yes. I haven't been burned. We haven’t said we are going to do it for sure. We’re very cautious and we don’t have any lack of trust or disillusion with the players. So I don’t want to give that impression because that’s not the case. We actually have grown to know both sets of people better. We continue to trust them and think they're going to do.

But the devils in the details and as we get into each part where it was made and where it came from and just today, we found out that the chunk of parts we thought we're going to see today, get lost somewhere and nobody is quite sure, if they're in FedEx or UPS or any container somewhere. So that’s kind of think, we’re going to as we gather up.

And this basically a very late-stage start-up company that’s going big time and we’re helping them transform their supply chain from I guess you would say a little bit of mayhem, start-up company mayhem and to getting everything under control and linear..

And then a couple of numbers questions.

The charges that have referenced for the March quarter, the math that I’m doing says that equates to about 9 pennies and as a result, if we exclude those charges and exclude any arbitration impact positive or negative that you would be guiding in the $0.09 to $0.14 range?.

That’s correct, Bill..

And then, the cost reduction initiatives in Mexico that you referenced.

What do you anticipate the ongoing savings to be from those as we start to think out into the future?.

Yes, we're taking a close look at that and based on our current forecast of revenue and with the change in required labor content and some production capacity that currently exists, we're expecting that our total facility costs in Mexico ought to be reduced by about 9%, which equates to roughly about $1 million a quarter..

And a million dollars a quarter ends up being something in the neighborhood of $0.30 a share annually?.

Yes, if everything pans out as we expect today, yes..

Okay that ends up being a big number.

So to what degree, would you anticipate that the growth of the business that you're talking about would consumer or chew up some of that $0.30 of savings? Or is it really an addition problem where you take your earnings and add the $0.30 on top of it?.

Well, I wouldn't call that a problem would you?.

Equation?.

We're reasonable hopeful that it is an addition equation..

Next, we'll hear from George Melas with MKH Management..

I'm just going to try to sort of continue little bit along the line of Bill's expert question. In Mexico, if you take down the cost by roughly 1 million per quarter.

Is that because there is significant excess capacity there now? Or is that related to some anticipated loss of revenue? How are you able to do that?.

It's related to -- it's not related to the significant loss of revenue. So, it's related to excess people capacity in terms of the business getting better under control and requiring less overhead to manage it.

And it's due to the maturity of the products that are in the facility not requiring as much rework and over time and it's due to better systems and controls in automation, again not requiring so much hand touching at the I guess one level above the direct labor workforce..

Okay, so is it that you have to sort of through a lot sort of a lot of bodies and a lot of management and colleague overhead in management sort of capability because you have any ramps going on now that your ramps are hopefully going to be in better sort of largely ramped, you're going to have fewer of these wins?.

Well, I'd say it’s that partially, it's also partially the mix of products down there are not as -- in its better shape, as they were originally. And it's also due to the fact that when your systems in controls are better, you don't have to throw as many bodies at a problem.

So, as we've driven the integration of the East to the West, we've been adopting a lot of best practices and spreading them across every facility in the Company and as we've been doing that we've been taking the expenses over the last year.

But now it looks like a lot of these efforts are beginning to pay off in terms of headcount and particularly the supervisory in technical and parts, handlers and people that are on salary rather than direct labor, that number of people is going down quite a bit for a given amount of revenue.

And two things that have changed are the mix of the revenue and our sophistication and controls in achieving that revenue.

Does that make sense?.

Yes, it does.

Has it been mostly process improvement? Or did you have to invest in both equipment and software and systems?.

It hasn't been as much process improvement. We've always been pretty good at that.

It was more of the management of the processers with systems and the way the systems work between Spokane whereas in the east, the way that we transfer products, the way that we maintain paperwork, the way that we report labor, the way that we report production, the way that we track production.

All of that and basically if you want to think of it in really crude simple way is we've gone from the old offshore model of people are essentially free, let's just throw some more people at it, to people are becoming increasingly expensive offshore and we need to implement the same level of sophistication in our business systems and tracking and all that, that you would in a more expensive locale..

Quick question, Brett. You talked about the inventory dispute with your large former customer, maybe you can answer that.

But what would be your confidence that you will actually win in arbitration? And also how much could be the additional claims related to cancellation fees and carrying costs that you guys have had to incur?.

George, you got to remember. When we have our lawyer in the room with us and his finger is place, the finger is pointed over the mute button. So you already know what to say on that..

Yes, there's really not more we can say. We tried to say as much as we could..

That is safe to say that you wouldn't be spending all that money, if you had some in-house, pretty high level of confidence that you could win..

Well that certainly makes logical sense..

Okay, logic is good.

Can you tell us how much the top 3 and the top 5 revenue contributed this quarter?.

Yes, give us a second to look up the numbers..

While Brett is looking me the answer, quick other question. So your gross margin did rebound a little bit from last quarter but they still quite a bit below for the previous levels. But you've made sure in your prepared remarks.

Brett, is you expecting the fourth quarter to sort of start to see revenue growth pick-up and margin improvement? What is the kind of margin that you guys are targeting? I don’t really want to see -- what a long-term is, but in the next of 12 months, could we get back to a 9% gross margin? Or is that just too high?.

No, I think we can't. If you add in the 1 million a quarter that we’re going to save out of whereas, and if you adding some revenue growth from these new customers, I think that’s a very reasonable goal..

And George I looking through the quarter to-date results. Top three customers contributed just around 30% of our revenue. So that really has not changed overtime..

The top three customers with 30% you said..

That's correct..

But they were 36% last quarter, right?.

Roughly..

Okay. Is there anything that requires an explanation to go 36 to 30 or….

We discuss that there were some softness and some longstanding customers I think in now we’re replacing that with revenue from new customer program as they ramp..

Okay. And is the component shortage that you guys talk about in the last quarter.

Is that still impacting gross margins and just production in revenue and customers?.

Yes, yes, yes and yes..

Okay..

It’s industry-wide, it’s actually got worst rather than better. And all of pundits including us, it’s going to be worst for the next year to year and half. And it’s been driven by the fact that there is now roughly 25 computers in every car, it was about 12 through 4 years ago..

Specifically, what parts are being particularly short or maybe you don’t want to….

Big issues are all the electronic parts and specifically micro processor started the whole problem. But now speeding the spread into dials and even registers and things like that..

Okay.

Is that affecting you guys in a big way than some of your largest competitors that have sort of more purchasing power?.

I don’t think so because the larger competitors again are buying for their customers. Just the customer has a power not the competitor..

Okay. Okay. And then I’m just going to ask really strange question, which is a follow-up to Bill’s question from last quarter. Last quarter, you mentioned, you’re signing up and exercise equipment controller, contract to customer. That could potentially be quite big. I think you said it could 15 million to 50 million fully ramp.

Are those still in the realm of possibilities, now that you know a little bit more about that customer?.

Yes..

Okay, very good..

But again, remember the answer of the question was, this is going to be a long small ramp..

Okay. And then, I'll ask my last question. As the ramp is coming from taking some business from other contract manufacturers, you would think that they would have their docs in row, they would have good documentation, good processes that would somewhat facilitate or transfer to a new manufacture.

Is that not the case?.

It can be the case, I’d say, it’s more of the case when we’re coming from a contract manufacturer or competitor to us. Then it is when we’re coming from an OEM to us. It is certainly a chance is better that you’re going to get better documentation. On the other hand, you’ve got a competitor, who’s not real happy about losing something.

So, there is not a lot of help. And we find that in many cases, the OEM has completely advocated in responsibility to maintain his own design and his documentation. So particularly if it’s been a product, it’s been in China for 10 or 15 years and the OEM is got more and more complacent with keeping that documentation up.

And then suddenly discovers that, he could save quite a bit of money or is having problems with insurance and supply. Or he just saw his product on the shelves with an exact duplicate, which has been one of our OEMs unpleasant experiences just in the last month.

Then when you go in and try to pull that information from the other CM to us, it’s worse than if it come from the original OEM..

Next, we’ll here from Sheldon Grodsky with Grodsky Associates..

I don’t know if you’re being diplomatic about the tax plan that Congress has passed.

But are you going to be affected by any excise tax coming out of products from Mexico or China?.

At this point in time, we are continuing down the same growth of current excise taxes. None of the recent executive orders have affected any of our specific products that we built..

So you don’t think that there is any changes as far as, the tax bill was passed in such double secrete manner that most American have not idea, what’s in it. But I remember, there were some threats about imports for Mexico and China.

So far, you don’t see any additional pressure on course because of that excise taxes from Mexico and China?.

Sheldon, we kind of -- those are two separate events in minds is while they definitely correlate, but there is the tax reform, which is in fact significant benefit Key Tronic, as we'll be paying less cash and our effective tax rate loss will decrease by at least 5%.

The excise tax from China or Mexico I think is another thing that continues to be negotiated and worked on, and at this point you probably know as much as we do..

The inventory increase in the quarter was unplanned.

Is this company not taking what you produced them?.

It was more in the case of -- we had every part except for one, so we couldn't build it. We had 99% of the value and we couldn't get one last resistor, so the effect of inventory. All of the other parts that inventory..

Okay, so the inventory is stuck, okay. And….

It's not necessarily, it's permanently stuck. It was just that we were delayed in getting the last part of -- last part in time to get the inventory built and out of the back door. So, as these….

The 21st century, what's happening to us, we can't manage our supply chains anymore?.

Well, you're going to have to take it up with some IC suppliers, somewhere, not me..

The last question for today from me will be.

Are -- regarding your arbitration, are there counterclaims asking for kind of money from you?.

We have no more comments on arbitration..

Bill Dezellem of Tieton Capital has a follow-up question..

I would like to discuss some clarification on something that I heard and I am going to try to pin you down a little tighter.

I think in response to my question about the Mexican cost savings, that the answer was a 1 million per quarter, but then later in the remarks to one of the other questioners I believe that 1.25 million per quarter came up, not to split here but if I heard that different, that's 1 million bucks a year?.

It's a 1 million a quarter..

Per quarter..

I understand my apologies for poor hearing..

I am sorry. It's probably Michaelmas [ph]..

So you had reference a long slow ramp with regards to the exercise equipment control, Wall Street, we don't think a long ramp is month.

What is the long ramp in your world?.

So, right now the product that we've been awarded is just going through its final design phases. It'll go into production some time -- will go into prototype production some time middle of our Q4.

And then we'll actually go into production sometime in the middle of our Q1 and that's the first quarter that will come to us that over time there'll be more new products designed that we expect to win also, so a long ramp to us is one or two years..

And would you consider that a normal level of ramp just in terms of us keeping our expectations properly contained?.

That one I think is a little bit longer than normal because we're taking over a product that is not quite yet designed. And when we're taking over an existing product from somebody else than a six months to a nine months, ramp is more reasonable..

Now, if you're involved in a design process, does that also though help you with a quicker ramp when production actually begins so you’re not having the surprises to come about from the customer having loss control of a blueprint, et cetera?.

Yes..

And then I do want to ask about one other thing that was in the press release and I think you made the reference in your opening remarks. About the U.S.

operations becoming increasingly profitable, would you talk a little bit more about that? And how we on the onside should we be thinking about that?.

Sure. Number one, we talk about, how we’re able to achieve the same revenue with less of the management/support people in Mexico. And that implementation to systems and management processes and all of that is also happening on, in the east. Meanwhile, we have been winning new programs steadily in the East and implementing them.

So we are seeing the blanket of revenue being spread more evenly and more effectively over the East overhead structure, and therefore driving higher profitability..

Great, that improved system implementation that you’re referring to.

Is that actually reading to you having more success winning business and so these two actually go hand and hand? Or are they not as correlated?.

Certainly, the existing of a bright and shining facility with bright and shining processes and systems that can be audited and stand up without any hand waving is all part of the opposite of a death spiral. So you got in your customer comes and looks the last new customer, you just broaden six months ago.

He can call up that new customer, who’s happy and hear that they did a great job in bringing those guys in and blah, blah, blah. This is all real momentum business to be in, business brings business and buildings that are clean and need and have great processes and look good bring more business.

And machine inside of them that run twice as fast than the machine you had before, particularly when you’re paying U.S. labor and management, mean you can quote to lower price. And all that just kind of swirls into a death line rather than a death spiral.

And the final cog in that wheel is, we've taken a big leap and added some personnel into our quoting and pricing process that I am probably the most excited about it. I've been in the last 10 years and getting that to be a world-class facet of our marketing. Over my 10-year, we’ve taken from a really, really bad weakness to kind of a neutral.

And I think in year from now, we’ll be able to point out and say that’s another piece of a happiness client rather than a death spiral..

So expand on that a bit more, if you would. In terms of and I’m going to expose my ignorance here. It seems as though the quoting process is the simple part as long as you don’t..

You’re so wrong, I couldn’t let you finish..

Please..

The quoting process is horrendously difficult, particularly for us, because we’re not just quoting a PCB. All we've been doing is quoting, stuffing a PCB, you can pretty much assume that it’s a $1.5 replacement and you can just crank out your code and you’ve done..

Right..

In our niche of the business which takes a long time to grow as we've seen, but it's wonderfully sticky as you do it. It takes a long time to let this use a swap machine as an example. So you got a product that could cost anywhere from $1,000 to $5,000 per piece. And most of the mechanical parts in that product are custom.

So they have to be form and paid it and they typically custom quoting log and typically the drawings are perfect, so there’s a bunch of talkback between the customer’s engineers and my engineers to figure out if this is a 90 degree bend, does it have 10,000 radius or did you mean that in millimeters.

And this is black critical coat is that black critical coat that stands up to a year in saltwater or is it 10 years in saltwater? And it’s just goes on and on and on. And then there is probably a bill of materials that has over a 1,000 individual line items on it, that are currently be in purchase by the incumbent that we’re quoting against.

So he has the inside track on the price of each of these components and we have a couple of weeks to go figure out what the inside track prices on each of this performance. Then, there is the actual manufacturing processes that are typically not well documented.

So I have a team of mechanical and manufacturing engineers, who have to from prints typically they don’t even get a part, they have to from print figure out, how many hours is going to take us to put this things together and tested. And that’s what’s required to quote and electromechanical product. And so that, if you want….

No, go. I’ll let you finish..

So if you want to think of our marketing expense and any contract of manufacturer's with marketing expense, we all pay ourselves guys and we all pay our reps, but you don’t see a lot of ads in the Wall Street Journal for Key Tronic in terms of trying to gain our customers that way. Our marketing expense is mainly coding..

So that really helps to highlight complexity. And so I’m glad you save me from myself with the question. Let me now take this is step further and understand.

What is that you believe you’re now doing better in that process that will make a material difference to your success going forward? Because clearly, your comment was not intended to be a light comment when you said it’s one of the things you’re most excited about which you have been in the last decade..

So a lot of this can be automated, if you can your systems together and your people on the same page and figure out how to undo the sins of 25 years in the past. So, let me give you an example, so let's say that one customer has one part, but he has three approved vendors from whom we can buy that part to put in his product.

And so, we've got part number A with vendor one, two and three. And then we have another customer who uses the same part number A, but he has two approved vendors and their vendors three and four.

So, now the Key Tronic has to someway figure out, how we can take volume advantage by linking together the demand for part A, on vendors three and four, while making sure that we don't throw vendors one, two, and five out with a bag in case something comes along like what's happening to us today with the shortage of parts.

So, if you can imagine the complexity of that times I think its 250,000 parts, I don't remember what the number is. Just automating that is the massive improvement I mean our ability to quickly say, oh, look we got another quote part A, it's like this guy will let us use suppliers three, but supplier three is more expensive than supplier one.

Let's call him back and say, if he is okay with supplier one. So, that’s just one little piece of everything that goes on that we can automate.

And so mashing together the East catalogue of parts, China's catalogue of parts, Mexico's catalogue of parts, and the process is then let them do this automatically, and share the best cost, best price is something that we've been doing in the past and almost everybody has some kind of automation system ranging from crew to elegant and we're moving from crew to elegant..

That will conclude the question-and-answer session. I will now turn the conference over to Mr. Gates for any additional or closing remarks..

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

That does conclude today's conference call. Thank you for your participation. You may now disconnect..