STRATTEC SECURITY CORP Q4 FY2025 earnings call

• In fiscal 2025, focused on creating shareholder value through team restructuring (refreshed executive team, added critical talent), simplifying operations (reduced headcount by 15%), implementing operating cadence and communication channels, reshaping product portfolio, and modernizing manufacturing operations. - Fourth quarter revenue grew 6% and full-year revenue grew 5%. Gross margin expanded 370 basis points in the quarter and 280 basis points for the year. EBITDA margin improved with fourth quarter at 8.5% and full-year at 7.7%. - For fiscal 2026, continue to focus on creating shareholder value, leveraging product expertise in key areas like digital key and power access to expand customer base, and use healthy balance sheet to invest in growth and create value for shareholders.

Fourth quarter gross profit increased to $25.4 million with gross margin expanding by 370 basis points to 16.7%. Gross profit improvement was due to a $3 million benefit from a stronger U.S. Dollar, strategic pricing actions, $1.7 million in tooling gains, higher production volumes, and $1.3 million of restructuring savings, offsetting $1.6 million of net tariff expenses. For the full fiscal year, gross margin improved by 280 basis points. Selling, administration, administrative, and engineering expenses (SAE) was $16.9 million, holding steady at about 11% of sales. Fourth quarter adjusted EBITDA was $13 million with an adjusted EBITDA margin of 8.5%. Operating cash flow for the quarter was $30.2 million, a 55% improvement over the same period last year, and $71.7 million for the fiscal year. Year to date, capital expenditures totaled $7.2 million, resulting in free cash flow for the year of $64.5 million. Ended the year with a very healthy cash position of $84.6 million and approximately $52 million available under revolving credit facilities.

• North American automotive production for fiscal 2026 is expected to be lower by about 5% to 6% with softness more prevalent in the second half. - Expect to benefit from recent pricing actions, especially in the first half of 2026. - Believe the business over the longer term with sufficient volume is capable of achieving gross margins in the 18% to 20% range. - Expect to continue to generate solid cash from operations in 2026 and beyond but at a more normalized rate.

• Tariff risks: Currently estimate annual cost increase between $5 million to $7 million before mitigation efforts, and cost recovery will lag associated expenses. - Market uncertainty in North America. - Labor cost pressures in Mexico. - Long cycle nature of the business posing challenges.

Q: How far along is the transformation process and how long will it take to be satisfied with most of it being completed?

A: Jennifer Slater said they're still in the early innings of the transformation, with fiscal 2025 addressing low-hanging fruit and further transformation items being longer-term.

Q: Is there a possibility of exiting or divesting product lines?

A: Jennifer Slater mentioned the switch product line has less opportunity as the market is crowded, and they're refocusing engineering efforts on products with more growth like power access and digital key fob.

Q: Can you give examples of the larger customer set?

A: Jennifer Slater said it doesn't necessarily mean outside automotive, with opportunity within automotive and potentially in transportation like heavy vehicle, off-road; priority is to start within automotive.

Q: How is the cash position and how is excess cash on the balance sheet considered?

A: Jennifer Slater said they're comfortable with the cash position as it helps focus on business transformation, and will consider longer-term shareholder value allocation when there's more certainty in the market.

Q: How does the digital key fob balance with physical key fob business and subscription revenue?

A: Jennifer Slater said there's consumer and customer drive for physical key fob, and subscription services are premature to think about with current product development stage.

Q: What is considered normalized free cash flow?

A: Matthew Pauley said 2025's $71 million cash from operations had about half as normal and half from one-time items, and normalized is expected to be around $20 million to $30 million free cash flow per year after accounting for low-hanging fruit.

Q: What's the expected inventory level?

A: Matthew Pauley said inventory turns at year-end were just over seven, expected to increase in 2026, with about $5 million more inventory needed on a part-level basis considering make to stock and make to order.

Q: Update on selling the Milwaukee facility?

A: Jennifer Slater said they're still in the process of selling the Milwaukee facility but no new update, not in a hurry to exit and want the right price.

Q: How hedged is currency and tax bill impact?

A: Matthew Pauley said over 70% of cash is in US bank accounts, and the tax bill will benefit from cash tax savings with about a $10 million deferred tax asset to be realized on R&D expenses.