Brett Larsen: No, we are expecting an increase in gross margin in this quarter. One, because of the layoffs, because of the actual cost reductions that are going to transpire. So roughly, you know, we mentioned it was going to take less than a half a year, so you know roughly 60% of those costs decreases 60% of the severance is offset by payroll cost reductions in the quarter. Additionally, we expect our debt to continue to decrease as we continue to drive inventory down. My expectation is that interest won’t be $3 million. It’ll be something less than that for this next quarter. And again, I think your op-ex of roughly $8 million is probably a good guess.
George Melas: Okay. But then that implies a gross margin that’s well north of 9%.
Brett Larsen: That’s our expectation.
George Melas: Okay. So that would be a really nice improvement compared to just more recent quarters.
Brett Larsen: Yes, we’re we’ve been in a situation where we make money out of America and we lose money in Mexico and then we make money in Mexico and we lose money out of America and it looks like we’re heading towards a position where we’re going to make money out of all the sites. So hopefully that comes to fruition and we don’t get another surprise.
George Melas: Okay, great. And the Mexican peso, I mean I was just doing the math, it’s up double digits, you over here. It’s down just a little bit a nudge sequentially.
Brett Larsen: We do have some hedge contracts that will help us in Q3.
George Melas: Oh, you have some hedge. Okay. Because at some point I think you had stopped hedging, right?
Brett Larsen: Yes, we entered into some hedges a few months ago that’ll take us through the March quarter.
George Melas: Okay. So maybe we’re talking a little bit about your hedging philosophy. It’s just so damn hard to hedge and it’s expensive. How do you guys sort of think about it?
Brett Larsen: In an ideal world…
George Melas: I’m sorry.
Brett Larsen: No, in an ideal world with ample liquidity and we would have hedged roughly 50% of three years Mexican expenses. We’re far from that. We did take advantage of a blip in the softening of the peso that occurred a few months ago. I wish we would have made more contracts but it’s difficult to project the future. Yes, when we can’t figure out what the economy’s going to do, then we can’t figure out what the Mexican peso’s going to do and we can’t figure out what to hedge. So we do have some hedges in place that will help us during this third quarter and we’ll continue to monitor the peso to the dollar and enter into more contracts if we can.
George Melas: Okay, great. Good. And just from a customer concentration perspective on the last quarter, we talked about just one customer right now being 10% in the 10% category. Is that still pretty much the case?
Brett Larsen: That is still correct. We have one customer above 10%.
George Melas: Okay, great. And Brett, congratulations. We’re excited about your promotion and wish you all the best. Thank you.
Operator: Next question comes from the line of Bob Poole with Bricoleur Capital.
Robert Poole: Hi, guys. Congratulations. It looks like things are all arrows, maybe except for revenues here in the very near term are pointed in the right direction, which is great. And of course, I’m referring to inventories down, margins up, and pipeline up. So that’s all great. And with that, Craig, I would ask you, we haven’t spoken before, but I’ve spoken to Brett, about the timing of your retirement. You’ve gone through the storm and it appears that the sun is coming up and you choose that as your time to step aside. Can you talk a little bit about the timing of the transition and then, Brett, if you would care to comment at all about what, if anything, you put as priorities under your new leadership.
Craig Gates: Okay. Well, I’m 65. I’ve been working since I was eight years old, started my dad’s trailer court. And I’ve had enough. So I actually was thinking about retiring quite a bit earlier and then COVID and everything else came along and I thought I needed to stay to make sure everything was, to make sure I could feel proud of how I was leaving the thing when I did leave. So this last year has not been as much as a glide slope as I hoped it would be. But as you say, we’ve had a major victory in driving inventory down. I think we’ve had a major victory in growing our U.S. sites and even with the wage increases and peso issues in Mexico, I think we’re as you say, the arrow is up there and what’s going to happen there is proven by the previous big wins down there.
So my timing is strictly based on the fact that I’m 65 years old. I’ve got two grandkids that live in town and they get old really fast. So it’s time for me to quit. There’s no issue with where the company’s headed. I’m very confident in Brett and the team we’ve got put together here. And as we said, I’m going to be staying on the board so it’s not like I’m not like I got beat and I’m running into the bushes in defeat. And it was nice of you to leave Brett with a six times inventory turn goal.
Brett Larsen: Yes, it is. I’ll have to remind him that that never occurred during his tenure. I would reiterate that this was a well-planned transition. It’s comforting to know that Craig will remain on the board and still provide a lot of the technical support that I think he adds so much value to. I would not anticipate any real sea changes in the direction we’re headed. As Craig has mentioned, we are extremely impressed with the management team at Keytronic and we’ve been hit with a lot of things in the market including a very strong peso, considerable amount of inflationary pressure, interest costs, but yet still we continue to drive profitability and expect that to improve. This is really a well-planned transition.
Robert Poole: Okay that’s awesome. In the last quarter, Lee, conference call, you talked about making some changes in Mexico then that potentially were going to save you $5 million a year. I was expecting to see possibly some severance type things in the quarter just reported. Was there any severance or unusual expense in the quarter just reported?
Brett Larsen: Nothing material. I think there was a small amount of severance but not to the level that we expect in Q3.
Robert Poole: Would it be reasonable to tie when you talk about six months and you talk about the upper end of the severance range being $2.5 million, does that tie then to the $5 million a year savings in Mexico?
Brett Larsen: Yes, roughly does.
Robert Poole: If the severance is smaller, does that mean the savings is smaller or is the savings the savings and it’s just a question of how much severance you have to give at the end of the day?
Brett Larsen: I think it’s a combination of all those things, Bob. We’re still trying to make the final determination of what positions, trying to also ascertain the pipeline and how soon new programs will be started down in Mexico. There still is some unknowns there, but severance, whatever we do, there’s a return of roughly a couple of quarters. At the high level, yes, you would expect to have some $5 million of savings annually.
Robert Poole: If George’s calculations are correct and they’re consistent with my back of the envelope, Craig, thanks for getting the table set for and delivering this quarter hopefully the kind of profitability that you’ve been saying for some time was the eye-popping profitability that was out there for you guys to achieve. It looks like you’re going to maybe do it in your last quarter. Congratulations for that and have a happy retirement.
Craig Gates: Thanks. I’ll talk to you one more time. This is my penultimate.
Brett Larsen: He’s not out the door yet. I’m happy that you will get to take the victory lap for George’s quarter. That’ll be great. I think George may be a little bit overexcited, but I still think things are headed in the right direction. I’m happy with the way I’m leaving it. I think George’s math is pretty straightforward. We’re going with George.
Operator: Thank you. Next question comes from the line of Bill Dezellem with Tieton Capital.
Bill Dezellem: On the line of questioning that was just there, I would also like to say congratulations and thank you for doing something a little bit unusual, Craig, which is leaving when things are on the upswing and positioning them well and then stepping aside so often. I think that CEOs leave at the top and then have a crumble after they leave or just the opposite end of the spectrum. Well done. Coming back to the Mexico-Vietnam phenomenon or situation, do you see customers moving production from Mexico to Vietnam or the Vietnam success in the future is really going to be from new business going into that facility?
