Strattec Security Corporation Price & Performance (STRT)

Thank you, and good morning, everyone. We greatly appreciate you joining us for Stratec's second quarter fiscal twenty five financial results conference call. With me on the call today are Jennifer Slater, President and CEO and Matthew Polly, Vice President and Chief Financial Officer.

For those of you who may be newer to the story, Matt just joined us as CFO in mid November last year.

Jen and Matt are going to review our second quarter twenty twenty five financial results and provide an update on the progress being made to transform Strathc Strattec. You can find a copy of the news release and the slides that accompany our conversation today on the Investor Relations section of the company's website.

If you are reviewing those slides, please turn to Slide two for the Safe Harbor statement. As you are aware, we may make some forward looking statements on this call during the formal discussion as well as during the Q and A. These statements apply to future events that are subject to risks, and uncertainties as well as other factors that could cause actual results to differ materially from what is stated on today's call. These risks and uncertainties and other factors are discussed in the earnings release as well as with other documents filed by the company with Securities and Exchange Commission. You can find these documents on our website as well.

I want to point out that during today's call, we will discuss some non GAAP measures, which we believe will be useful in evaluating our performance You should not consider the presentation of this additional information, isolation or the substitute for results prepared in accordance with GAAP. We have provided reconciliations of non GAAP to comparable GAAP measures in the tables accompanying the earnings release and slides. With that, if you would turn to Slide three, I will turn it over to Jen to begin. Jen?

Thank you, Deb, and welcome, everyone. I am encouraged with the progress we are making to transform Strattec into a Strattec, sustainable business with improved earnings power. I appreciate your time today to learn more about this progress. Let me first touch on some highlights of our second quarter results. We had another solid quarter of performance and generated $9,400,000 in cash from operations in the quarter, bringing us to about $21,000,000 in the first half of our fiscal year. This is much improved over the use of cash for the first half of fiscal 'twenty four. Revenue grew almost 10% to despite last year's second quarter benefiting from $4,000,000 in retroactive [indiscernible] Margins also improved with adjusted EBITDA margin [indiscernible] Of note, we continue to execute on our strategic priorities of stabilizing the business, [indiscernible] portfolio to advance our transformation. I'll address this more fully if you would turn to Slide four. Our focus on operational excellence and optimizing our structure resulted in the elimination of one shift in our Milwaukee operations. This change will provide $1,200,000 in annualized savings that will be partially recognized beginning in the third quarter the quarter, we are operating in now, We recognized $300,000 of restructuring costs resulting in a very quick payback.

We also identified that our Milwaukee facility, which is 350,000 square feet, is roughly twice as much manufacturing space that we require for the stamping, die casting, plating and other operations we have in the facility. The building has been listed for sale and the results of the process will help inform our next steps. We are continuing to review our manufacturing operations to identify more ways to reduce costs in the business. And yes, the elephant in the room is tariffs. While this continues to be a fluid situation, our ongoing efforts to optimize our costs will help in some respects. Along with our strong balance sheet.

Regardless, we are being proactive in conversation with our customers and suppliers to better understand the implications and develop any necessary measures Shay Barto, our new Chief Commercial Officer, has hit the ground running and our commercial team recently capped Of course, the pricing gains are dependent on but we expect that we should begin to realize the improved pricing in the third quarter. We continue to improve our working capital specifically by working down our preproduction tooling cost balances. The strong effort of the team has reduced the balance by $10,500,000 or nearly 50% since the start of this fiscal year.

Importantly, I believe the investments we are making in upgrading and enabling our talent pool is resulting in accelerating the pace of change here at Stratek Strattec. Much of what we are discussing on the call today such as rightsizing our operations, the pricing gains and the metrics to better understand our underlying performance our direct outcomes of our investment in our team. Let me talk to the drivers behind our revenue growth on Slide five.

Second quarter sales increased $11,000,000 as a result of new product launches, higher demand for our products that more than offset end of life programs. Much of this growth is higher value content in power access and latches. In addition, we have customers that are building inventory to address their production plans. Sales of Power Access products were up 27% year over year on new programs, higher value content and Engineered latches grew 20% over last year's second quarter for the same reasons. This more than offset the continued decline in our mature product line of keys and locksets. Let me turn it over to Matt now to cover our financial results in more detail.

Thanks, Jen, and good morning, everyone. Moving to Slide six, gross profit was up $3,700,000 to $17,200,000 a 27% increase compared to the second quarter last year. The $3,500,000 benefit of favorable FX and higher production volumes more than offset headwinds from the prior year one time net pricing recovery of 2 point $900,000 and increased labor costs. Labor costs were up $1,400,000 reflecting the 20% government mandated wage increase in Mexico. We also accrued $600,000 for bonuses this year. Gross margin expanded to 13.2% with a two seventy basis point benefit of favorable foreign exchange. Excluding the impact of currency and the prior year one time pricing recoveries, we delivered about 100 basis points of margin expansion. I should touch on tariffs here a little. As is true with the majority of the automotive industry, are heavily reliant on our assembly operations in Mexico and our global supply chain to provide product to our customers. Approximately 70% of our sales are shipped to The U. S. Or picked up by a customer at our distribution center in El Paso. The remaining 30% are sold to OEMs globally. We have certain actions we can take and a few levers to pull.

Where the tariff situation lands will also feed into our strategic evaluation of our footprint from a longer term perspective. Moving to Slide seven, engineering, selling and administrative expenses or ES and A totaled 15,000,000 a 1,600,000.0 increase compared with last year's second quarter Half of the increase was related to an $800,000 annual bonus provision.

Of note, no bonus provision was taken in the comparative period. We also had $300,000 of incremental non cash stock compensation $300,000 of restructuring costs, and $200,000 of costs related to the transformation of Stratek Strattec.

We are investing in people and processes to drive greater predictability and a stronger earnings profile.

On Slide eight, net income for the second quarter was up 29% to $1,300,000 or $0.32 per diluted share. Offsetting the benefit of higher operating income $300,000 increase in investment income was a $1,500,000 increase in other expenses related to gains and losses on our FX hedging activity. As you will notice in the news release, we are now presenting two non GAAP measures of adjusted EBITDA and adjusted net income. Given the investments being made to turn Strattec into a more predictable, and better performing business, we believe these metrics help you understand the underlying performance of the business. We are also using these metrics internally as well to measure our performance. We have provided the reconciliation tables for each period and the full year fiscal twenty twenty four for your information. Adjusted EBITDA for the quarter was $8,000,000 up 60% compared to the same period last year. Adjusted EBITDA margin expanded 180 basis points to 6.1% due to higher sales volume, favorable changes in FX rates and cost management initiatives, On an adjusted non GAAP basis, net income for the second quarter was $2,600,000 zero point six five dollars per diluted share. This was up 81% from the prior year second quarter.

Lastly, Slide nine highlights our solid balance sheet financial flexibility and capital priorities. Free cash flow increased by $12,500,000 versus last year's second quarter due to improved operating performance and reduced net working capital. Most of the working capital decline was related to the continued efforts to recover preproduction costs from our customers, we ended the quarter with $42,600,000 in cash, I'm reevaluating the capital expenditures for the year and expect to have a better understanding of our needs when we report the third quarter. In the meantime, CapEx of just under $1,000,000 in the second quarter $3,000,000 in the first half of the year was primarily related to new product programs and equipment upgrades. Our capital priorities as we advance through the transformation of the business are internally focused on operational efficiencies, organic growth initiatives. While the current tariff situation creates a potential challenge in the near term, we are encouraged with the actions we are taking to advance Strathc through operational excellence, strengthening our commercial initiatives, capturing the value of our innovation and creating an energized and experienced team. With that operator, we can open the line for questions. Thank you. We'll now be conducting a question and answer session.

Thank you. Thank you. Our first question comes from the line of John Franzreb with Sidoti and Company. Please proceed with your questions. Good morning, everyone, and thanks for taking the question. Jen, I'd like to start with your assessment of progress that you've made as far as the evaluation of the company. Your opinion, how far along are you? And when do you think the process will finally be initially completed at least?

Hi, John. Thanks for the question. I feel really positive about the progress that we're making, but I still think we're really early in the process We're I'm seven months in and I would say we're making good we've we're proud of some of the things that we're doing, but there's a lot more work to do, John.

Okay, fair enough. And in the prepared remarks, you mentioned the benefit of higher value products as far as benefiting the not only the top line, I'm assuming the margin profile. Can you give us some examples of of those products and maybe talk a little bit about why they're doing better today than we're say a year ago?

Yes.

So in our Power Access products with our power sliding doors and power lift gates, we've seen some good growth in just demand from customers and program launches there.

Understood. You mentioned about $8,000,000 of new pricing starting in the third quarter. Can you give us a little background of how you're able to achieve that that kind of new pricing after getting a fair amount recognized last year?

Yes. I think as you know with our automotive customers, we enter into longer term agreements. And one of the things that Shay Barto has done is really worked with our customers and understood where we were in our contract life and where they wanted us to continue to support them as they may be extending those programs.

So really that pricing is just a representation of some of the work that she's done with the team and where customers are extending programs or outside of the contract life and we're recognizing near term economics This is Matt. I'd just add that the pricing that we achieved is a across multiple different of our product categories and across multiple different OEMs.

That's good to hear. It's good to see the balance. And regarding the tooling, should we kind of view this as probably a stable go forward level or you think there's more to achieve as far as tooling benefits Yes, I think we've made significant progress on the tooling balance in the first half of the year. I think there's a little bit left to go, but the pace of change or the pace of reduction will level out here in the back half of the year.

Okay. How Archie ended it there and did somebody else some questions. Thanks for answering my questions everybody. Thank you, John. Thank you. Our next question is from the line of Guy Barren with Spring View Capital. Please proceed with your questions. Hi, Jen and Matt. Question the prior John already asked some of the questions that I had. But on the $8,000,000 in annualized pricing, is that a midpoint of a range because you said that it depends on customer demand. So how did you is that a midpoint or is that a or is there a range to that $8,000,000 of pricing that you've you expect to get?

Yes, it's the projected annualized value of the impact based on our projected sales.

Some upside and some potential downside to that based on demand.

Yes, based on our customer production.

Okay. Okay.

And then when should you when do you expect to cycle the 20% the wage increases in Mexico?

Yes.

We saw the last impact of that here in our second quarter.

So that was the 20% increase was the Meriting or the mandated increase last January. This January, the merit increase was much less than the 20 So the impact of that will kind of diminish as we go forward?

On a quarterly basis? You'll still see the impact of the 12% merit increase as we go through the balance of the year here.

Okay.

And then on the on the real estate on the headquarters, I saw you listed it for 17,000,000 has that been received so far? What are you seeing out there in terms of [indiscernible] Yes. We just listed the facility in January. So we're early in process. But what I'd say is I think the brokers are happy with the activity and the interest in the facility right now.

Okay.

How long do you see that process taking It's really hard for us to anticipate, but it's still going to take us some time to get through the full process.

And then high level question really is on your run rate EBITDA power. Right? So you did adjusted EBITDA $18,000,000 or $19,000,000 in the first half of this year.

And typically your seasonality is such that you generate like 30% or 35% of your annual EBITDA in the first half and [indiscernible] 70% or so in the second, which implies full year EBITDA range can be $50,000,000 $55,000,000 is based on [indiscernible] the performance that you have achieved so far this year. Is that a good run rate? That would be [indiscernible] Really nice number.

No, I don't think that's necessarily the run rate. I think if you look at it our sales are slightly higher in the back half of the year than the first half keep in mind there was a lot of onetime retro pricing in the prior year. Which makes that comparison maybe a little bit difficult on a go forward basis. Got it. Great. [indiscernible] you so much. Thank you, Kai.

Our next question is from the line of Brian Sponheimer with [indiscernible] Hi, good morning, Jen, Matt and Deb.

Thanks for getting me on here Couple of quick ones about balance sheet. Obviously, with quite a bit of cash now. On the balance sheet. Obviously, you have some needs as it relates to how you want to potentially move the footprint. But assuming that the Milwaukee headquarters is a positive sale and continues to improve. How are you thinking about financial structure for the business going forward?

Yes. Thanks for that question. Obviously, the cash is important for us right now as we navigate through the to realize our operational efficiencies. And making sure we've got the right processes and technologies in place We're also looking at our product portfolio and where we may need to invest organically for our customers to continue growth. And then I think we get a more longer term focus after that One off the balance sheet, the accrual for PUSH didn't ask that last quarter, but can you just talk about that? That's a little bit bigger than it's been in the past. Yes. In the quarter, we did make a reclass [indiscernible] associated with our Mexican post retirement benefits Previously, the balance was reported as short term and it probably properly should be reported as a long term liability. So it's just a balance sheet classification. Anything change about No. Did you do anything or was it just improperly It's just a just a balance sheet classification. The liability was properly stated and the expense was properly recorded. In the past. Got it.

Okay.

Just kind of thinking about products and what you're finding clearly power access is doing great. Have some headwinds on the lock and key set side But as you're kind of getting your really planting your roots here, Jen, Anywhere in particular that outside of power access you see some opportunities to really grow the the production base from a customer standpoint We are as we're working on our internal focus on operational improvement, we're parallel So if you talked about power access, That's the easy part for us to look at to see what other addressable customers within could use that product portfolio. And then we go out from there, Brian, and look at what other opportunities do we have organic All right. Thanks. Any other questions, I'll take offline. Okay. Thanks, Brian.

Thank you.

Our Our next question is from Guy Barron with Spring View Capital.

Please proceed with your question.

Hey, quick follow-up. On the customer side, you mentioned really good progress with Ford and GM and Kia. What is the Lantus been having problems, they're a big customer? Are you seeing that I assume that was a headwind over the last couple of quarters.

What do you see that going How does that business Strattec customer trending for you?

Yes. A lot of our sales are dependent on what platform we haven't seen while they've been managing their inventory, we haven't seen any significant changes with the platforms that we're on with Solontis and the products we provide.

Okay. [indiscernible] are yourselves with them year over year? In the quarter?

They were down about 10% in the quarter on a year over year basis.

Okay.

All right. [indiscernible] This will conclude today's question and answer session and also will conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time and have a wonderful day.