STRATTEC SECURITY CORP Q1 FY2025 earnings call

Product Portfolio: Taking a market-driven approach to define future product roadmap, focusing on areas where they can add value and have differentiators. ### Operational Efficiencies: Evaluating supply chain, inventory, and operational processes for modernization, rethinking operational footprint including capacity utilization and manufacturing footprint. ### Team and Talent: Appointed Linda Redmann as Chief People Officer and Chey Becker-Varto as Chief Commercial Officer; focusing on accountability, role alignment, and talent development. Financials: Gross profit rose slightly to $18.9 million, gross margin 13.6% with benefits from favorable FX and ongoing price improvement. ES&A expenses totaled $13.9 million, up $1.3M YoY. Net income $3.7 million or $0.92 per diluted share. Operating cash flow increased by $15.2 million vs last year, ending the quarter with $34.4 million in cash.

Total net sales for the first quarter reached $139.1 million, an increase of $3.6 million or 2.7%. Excluding the one-time retroactive pricing impact from last year, underlying sales rose by $11.6 million or 9.1%. Gross margin for the quarter was 13.6%. Growth was primarily in power access, door handles, and latches, while there was a decline in sales of legacy keys and lock sets. Revenue contribution details: total net sales at $139.1M, with growth driven by ongoing price increases, new offerings, and content on new platforms, including a 19% increase in sales to Ford and increased sales to Hyundai/Kia for power door products.

Capital Expenditures: Anticipate approximately $15 million in capital expenditures in fiscal 2025 focused on supporting new product initiatives, productivity improvements, and general maintenance. ### Future Focus: Focus on future pipeline to increase profitable content on the next generation of platforms.

Automotive Industry Headwinds: Reflect broader macroeconomic conditions, with demand influenced by automotive production rates. ### FX Volatility: Significant volatility in U.S. dollar to peso exchange rate. ### Volume and Sales Variability: Seasonal business with lower volume around holidays, variability in customer and product mix.

Q: Hello everyone and congratulations on a good start to fiscal 2025. Jennifer, I'd like to start with you. You've been on board for a couple of months now. I'm wondering what your impressions are at the company relative to your expectations going in?

A: Hi John, thanks for the question. When I came into the company, the reason I came into the company was it had a strong history in the automotive industry, a good solid product portfolio, and good people. And my impression of the business is those three things still hold true. And what I'm working on now with the team is how do we build upon those things to continue to drive improvement for the business.

Q: Going into the quarter, the 13.6% gross margin, your prepared remarks seem to suggest that it's sustainable, absent the variability of the 190 basis point impact of FX. Is that how we should be thinking about the business model on a go-forward basis? Or is there any other puts and takes we should be cognizant of?

A: Thanks, John, for the question. So, when we look at our profitability, we have a large part that's subject to variability in volume and sales. We're a seasonal business, typical automotive, you've got lower volume and production when you get around the holiday period. We do have variability in our customer and our product mix. So, some of our products have higher margin. And then obviously, we've got FX variability. And I think an example of our mix is we talked a bit about Hyundai/Kia. That's a good product for us. We know that was probably more of an inventory build than it was ongoing higher production and that shows the sensitivity of our business through customer and volume mix.

Q: Unidentified Analyst: Welcome to the company, and thanks for a great first quarter. Has your -- I'm curious to know, has your pricing caught up with the inflation in costs and your inputs?

A: Hi Ethan. Thank you for that question. We did make good progress in our pricing last year. What we are seeing is the industry is getting back to a more normalized view of pricing. We are looking for opportunities still where there's price, but it would be a fraction of what we were able to recover last year.

Q: Unidentified Analyst: Okay. Thanks. And then what growth opportunities do you see in power tailgates for pickup trucks, both in terms of adding new makes of trucks and increased popularity among retail purchasers?

A: Thank you for that question. One of the things that we're doing is we're continuing to define our strategy is looking for the areas of opportunity within our product portfolio, where we have opportunity to grow the customer base that we have today as well as new customers within the transportation and automotive market. I'm excited about having Chey join the team to leverage her knowledge and experience in this space to continue to look for opportunities for those products that have been good growth products for us.

Q: Unidentified Analyst: Okay. Thank you. And then what are the prospects for either a small stock buyback and/or reinstating the dividend? I mean, you have plenty of cash in the balance sheet right now, so I'm curious.

A: Yes. Thank you for that question, too, Ethan. So, for us, right now, it's about making sure that we've got a stable business. We are in a cyclical industry and we want to make sure that as we're looking at our long-term strategy and that unfolds, that we have a better understanding of the cash-generating potential of the business and the best uses of the cash in the future.