We'll get started.
Good morning, everyone. I hope you all had a great night last night and that the Vegas nightlife didn't get you, or that you had some prosperous times at the tables. Some of us did not. We're going to start our day with a great company in the midst of a transformation. We've learned that great investment ideas come in all shapes and sizes. Strattec is no different. Headquartered in Milwaukee, Wisconsin, the company is a manufacturer of automotive access products, primarily for the North American market. About 4 million shares trading around $65.5 this morning. It's about a $300 million equity cap. Great balance sheet with roughly $100 million of net cash, no debt, so about a $200 million total enterprise value. Jen Slater is the company's President and CEO, and we have Matt Pauli here, who is the company's CFO.
Jen's going to walk us through some slides, and then we'll get into some Q&A. Very excited about a great second day, and thank you all for being here. Jen, this is yours.
Good morning, everyone. Fortunately for me, I was first to present, which means I couldn't spend too much time at the casino and do too much damage last night. I will start with our safe harbor statement, just covering any forward-looking statements that I may make during today's presentation. We thought it'd be helpful for those who are not as familiar with Strattec to give a couple of slides introduction before we get into the Q&A. We've been a public company since 1995. Brian mentioned our market cap and today's stock price. You can see from the right side, we've got a very diverse product portfolio that I will talk about further in more slides. We are primarily a North American automotive supplier. We are very concentrated with the Detroit Big Three, Ford, General Motors, and Stellantis, accounts for over 65% of our revenue.
From a product standpoint, we've got a pretty balanced product portfolio. We have 7% of our sales in the aftermarket. That's primarily with our key fobs business. Then our footprint, we've got our headquarters in Milwaukee, go Brewers, but I'm a Lions fan, so I'll also talk about our Michigan office in Auburn Hills. That's our customer center where we have our sales and engineering. We've got four Mexico manufacturing locations, and we have a distribution center in El Paso, Texas. We also have manufacturing in Milwaukee, where we do a lot of our vertical integration, die cast, and stampings. Our products are categorized into three areas. Permission is where the company started with our traditional lock and key business. In this space, we are working on next-generation technology for digital key fobs.
It took me a while to understand what digital key fobs were, but Mario was always very interested in digital key fobs, so I learned very quickly what they were. It's really a key fob technology working with ultra-wideband, integrated with your phone seamlessly. So, if your battery dies, if you want to transfer your key fob to a family member or a valet, it's a seamless experience for the consumer. It's really the next generation working with the next electrical software vehicles. We also have a joint venture with ADAC Automotive where we do door handles, and that's in our Permission business. From a motion standpoint with Power Access, this is actuators, power sliding door, liftgates, tailgates, and then hold is primarily latching mechanisms.
We've got a very diverse set of capabilities that has kept us very close to our customers for as long as we've been in this space. We do have injection molding, painting capability. I mentioned zinc die cast, plating, and assembly. We also have some capability for PCB manufacturing. What I would say is more relevant here is the software work that we do with our products, and I'll talk a little bit more about that in a future slide. It was interesting to me because Walter last night talked about how things have changed In the last 50 years, but for me, they've changed pretty dramatically in the last two years. When I started, I had the opportunity to join the Gabelli Conference pretty early on as CEO of Strattec, and we actually did our first earnings call ever in the history of the company here in Vegas.
It's important to just understand where we've been over the last two years because it really tells us where we're going and the opportunities that we have in front of us. What we have achieved over the past two years is we've been very focused on our cost structure, so we've reduced our headcount by 24% over two years, realizing $10 million in annualized savings. We've captured a lot of low-hanging fruit with our pricing, so we've captured $17 million in structural and opportunistic pricing. Then we've spent a lot of time in modernizing the business. We had an email system called GroupWise. Fortunately, they went to Outlook shortly before I joined. Paper expense reports, signing up for benefits paper, no financial consolidation system, no pipeline management system.
We've been working very hard to make sure that not only do we have the people in the business, but we have the processes and the tools to lay a strong foundation for our future. What's in process right now? We're continuing to break down our organizational silos. We've been a pretty siloed organization, not only from site to site in the locations that we have, but also for how we think about our products. We have a latch team, we have an actuator team, we have a software team. But really, the value that Strattec can provide to our customers is as we think about bringing all those together in a system-level approach that allows the software with changes in software-defined vehicles to integrate with our mechanisms and allow a more seamless consumer experience.
We're really in the early stages of being able to articulate what that means to winning in the market and how this differentiates us from our competitors, where we feel it's a big opportunity for us as we go forward. We're also continuing to look at our cost structure. We're very early stages of an automation journey, and what I mean by that is if you look at our core business, and we've got assembly stations, independent assembly stations, about 11% of our assembly stations are automated. There's a huge opportunity for us to continue the automation journey as labor has increased, automation costs have come down. It provides a better product, better quality for our customers, and also keeps us very competitive in the market. That's a large focus for us.
Just as we've spent a lot of time and been very vocal about the progress that we've made in margin, we're also actively working and laying the groundwork for our revenue and our future pipeline opportunities. That takes time in automotive, but it doesn't mean that we haven't been hard at work in this space, looking at both organic and inorganic opportunities. Where do we want to be? Obviously, I talked about where we were, but where we want to be is we want to continue to build scale to the business. We want to have a more diversified customer base. Why that's important to us is because there are a lot of changes with platform planning, what customers are winning and losing in the market, and to build resiliency into the business, we need more stability around the customers we serve and the platforms we're on.
One of the great things about our business is we are powertrain agnostic. It's the first time in the 8,000 years I've worked in automotive that I've worked in a business that we really have a powertrain agnostic portfolio. But it still means we do get impacted by changes in product plans, individual platforms, and customers. The more diverse we are across that customer base, the more resiliency that we build into the cost structure and our revenue of the business. People and our culture continue to be a big part of that. We want to make sure that we are a place that retains our employees, which we've done a great job with, but we also want to be a place where we continue to bring in the right talent.
I feel that we've got a lot of exciting things with our product and our vision and what we do in the market, and it's really being able to build all the other things around that are going to have a long-term vision for the company and build on the foundation that we've worked very hard over the last two years to build. I talked about the long cycle nature of the automotive business, and this slide just really represents the legacy focus for Strattec was really responding to our RFQs when they came. We had strong relationships with Ford, General Motors, and Stellantis, but we weren't necessarily working with them upfront in the product planning life cycle, which means as we thought about our products, we weren't thinking about what we needed to continue to differentiate and solve the problems they weren't able to solve for themselves.
What we've been focused on today is more upfront in the journey and five years to launch, building those relationships with the engineering teams that make sure that we've got products that others in the market can't compete with because we've designed ourselves into the vehicles at that time. Where we need to get to is working even further upfront in that product cycle in the five to 10 years, and that's really the next phase of how we're thinking about our product plan. Brian did mention we have been able to generate quite a bit of cash through the margin improvements we've made in the business and cleaning up some of the balance sheet items that were legacy for the business.
We're continuing to invest in our opportunities to improve our margin, like I talked about with automation, continue to build on our product pipeline for future organic revenue growth, and that helps us as we think about the diversification of customers and increasing our scale. But we're also looking at things that would make sense from an inorganic growth standpoint, knowing the long cycle nature of the business and helping us get to that future vision faster. That's very important for the future of our business. With that, I'll hand it over to Matt.
Thanks, Jen. I'll quickly walk through our financial results. For those of you who are new to Strattec, we are a June 30th fiscal year end, so we just released our first quarter results for the quarter ended in September. Starting off with sales, we ended the first quarter at $147 million in sales. Our sales were down about 3.4%, with about a $1 million benefit from pricing and a $6 million headwind in volume. Our sales largely followed the North American automotive production, which was down 3.8% for the same period. On the right-hand side of the slide, you'll see our sales trend over the last four years. It's about 5% annual growth, with fiscal 2026 being a record high for Strattec at $579 million. On a trailing 12-month basis, it's about $574 million in sales.
If we look forward, we will largely follow North American automotive production for the next two years from a top-line sales perspective.
Right button.
Right button?
I did.
We're going to have to charge you for that.
Yeah.
All right, then looking at our cost structure, both from a gross margin and an SG&A perspective, we ended the first quarter at 16.5% gross margin. Our gross margin was down about 80 basis points year-over-year, largely due to the reduction in volume and currency. Excluding currency, our margins were up 20 basis points on lower volumes. I think the interesting thing on gross margin, if you were to go back and look at our margin profile from 2024, so prior to Jen and I joining, prior to starting the transformation, it was a 12% gross margin business. We've made a lot of progress in the last two years, and you see that in our gross margin, but we have a long way to still go. Our target for gross margin is 18%-20%.
From an SG&A standpoint, we ended the quarter with 12.2% of sales. It's a little higher than we'd normally expect, just given some business development costs in the quarter. Longer- term, we'd expect our SG&A to run about 10%-11% of sales. This slide just summarizes our profitability metrics, whether that's net income, adjusted net income, or adjusted EBITDA. The year-over-year decline are the two factors I mentioned earlier, the top-line sales and currency. Despite those challenges, we did deliver a $1.85 per share of net income, and our adjusted EBITDA was 9.2% or $13.5 million. If you were to look at our adjusted EBITDA on a trailing 12-month basis, it's approximately $50 million. Jen mentioned the cash that we have on our balance sheet of roughly $110 million.
We also have an unused revolver of about $40 million, so capital allocation is a priority for us. We have four priorities from a capital allocation standpoint. The first two are more internally focused, investing in growth, supporting innovation, supporting new customer programs, and funding the transformation. That includes some investments in capital. We've invested in some new die cast equipment in Milwaukee. We're investing in automation, and we also have some costs associated with the headcount reductions that we've done to rightsize the workforce in Mexico. The second two priorities are more strategic in nature, that being M&A, which provides the benefit of adding scale, customer diversification, and product extensions. We do have a share buyback plan that was recently put in place. So there's $35 million outstanding or available under the buyback plan.
If you look back over the last six months, we've repurchased roughly 4% of our outstanding shares. Our outlook for the balance of our fiscal year, so through next June, from a revenue standpoint, third-party estimates would say sales will be down about 2%, and the Big Three would be down 6%. So we'll be down slightly more than the 2%, just given our concentration with the Big Three. From a gross margin standpoint, we just delivered a quarter of 16.5% gross margin. We'd expect our margins for the balance of the year to be 15%-16%, just driven by reduced volumes. From an SG&A standpoint, our costs are relatively fixed in the short- term, so we expect it to be about $16.5 million-$17 million in cost, but longer- term, it'll be closer to 10%-11% of sales.
Lastly, from a cash flow perspective, our target is about $40 million of cash flow from operations for the year, and we delivered about $10 million in the first quarter, so we're well on our way. Lastly, I'll leave you with this slide, which is the Strattec investment rationale. As Jen mentioned, we are a transformation story. We're probably in the fourth inning of a nine-inning game for the transformation. We're focused not only on growth, but also on adjusting our cost structure. We've got a brand new executive team, and roughly 50% of our next-level leaders are new within the last two years that are helping to drive that transformation. Lastly, we've got a strong balance sheet to support us in those efforts. With that, I'll open up for questions.
Great. Thank you again for being here. Just to kind of touch on some of your remarks, Jen. Again, for those that weren't here yesterday, this is an interactive symposium. We certainly want our colleagues to be asking questions as well. We'll go right to you, Kevin, after I ask the first one. Jen, you mentioned you're about 11% automated, or when you joined, you were 11% automated. Where do you want or need to get to, and where do you measure that today?
Yeah, we're currently building the plans to see how far we can get, but we're a long way away from where the opportunity is. When we're talking about automation, as we're looking at kind of next-generation launch programs, we'd look at more disruptive automation. When I talk about disruptive automation, I would say that we would redo the line because you've got a longer program life, and the investment makes sense for a full new line. When we're talking about automation here at 11%, we're talking about very simple automation. So, you've got an operator putting something into the assembly by hand or taking a driver and screwing in something by hand. We've actually demonstrated automation for those things already in the plant, and it's just really a read across.
What we're working on is because we know that our investors are keen to understand what that roadmap looks like, but we want to make sure we've got the confidence and the investment behind it. We're targeting by the end of this fiscal year to be able to give more insight into what that looks like. I would be surprised if the number isn't more than 50% because automation costs have come down so much that I really think there's a tremendous opportunity there.
Yeah. Without putting any numbers to it, because you really can't yet.
Yeah
I would imagine the gross margin impact would be very measurable.
Yeah
On that.
Yeah. It is really, we talked a lot about the team and the change in the team. What has been very interesting for me is we have a very positive culture. Usually when you are going through a change like this, you have a lot of people pushing back. What I would say is our teams are not pushing back. We have a lot of legacy employees who do not have the other experiences to build on, so it is really showing them what good looks like, and then they have been executing. In this space, it is pushing the thinking a little bit more. For example, last year, they automated 16 stations. I think that they are proud of the work that they have done, and that is great, but why can I not double that a quarter?
That is kind of the push that we are driving with the team to show them what the art of the possible is and how to think to drive a different level of a pace.
What I would also add, Brian, is it is about a one-year payback on the automation that we have done so far, so we should see a benefit in margins quickly.
Yeah.
Great. Kevin?
Thanks. I guess this works. Kevin Dreyer from Gabelli. Just a couple questions. Brian hit on it with the automation a little bit, but in terms of your gross margin profile, you have made so much progress so far in your last two years. How far can that go? What do you need to do to get there? What is the timeframe? Then somewhat related, capital allocation, you have got a lot of cash. Is that a key component too, to build the scale, to get the gross margin up, to get the EBITDA margin up for the business?
Yeah. On the gross margin, we have been saying 18%-20%. 18%-20% really is with the products and the customer concentration that we have today. We feel comfortable that we can get to the 18%-20%. I talked a bit about our product portfolio and differentiating it. Really, if we can drive more differentiation in the value proposition longer- term, I think that we can do better than that, but we are not to that stage right now. So, we are comfortable with saying the 18%-20%.
As far as the timing of that is what we are working on by the end of this fiscal year to better articulate, because it is not about how we get there, it is about how fast we get there and how fast the team can go and how do we get better balance between what we are doing internally and what we are doing to get third-party support, because we know the payback is good. On the capital allocation piece, when we are talking about assembly, what we have been saying is our capital spends about $12 million. The investment that we are talking about for automation will be covered in what we have been saying. So, it is not a significant investment on the automation side, because automation costs have come down so much.
Yeah, the only thing I would add is to get to the 18%-20%, there is probably two primary levers. One of them is automation, which Jen touched on. The second piece is around supply chain. So, we have got a new supply chain leader, but admittedly, they are focused on stabilizing the legacy supply chain. But I think that is the other big option for us is on the material side and VAVE and getting the right supply base in place.
When looking at what you're going to do with all that cash you have, I know you want to diversify your customer base. I'm curious from a product perspective, do you also want to diversify outside of Permission where you're so strong, or is it more about getting into that with new customers?
Yeah. When we think about organic growth opportunities, we want to continue investing in the spaces that we have today with Permission, motion, and hold. When we think about inorganic opportunities, we'd like to be complementary to the spaces that we're playing in today in automotive, just for what we still have to build on the foundation, because we recognize we want to be comfortable with any execution risk, and to build on the business that we have today, we want to stay as close to our core. I think longer term, when 10 years, you asked me this last night, where do we want to be? We definitely want to be diversified from a customer standpoint, but then I think we would look at, is there other diversification that would make sense for us?
If we can continue to build on our aftermarket business from what we have today in the 7% revenue for products that fit in that space, or if we think about mobility in a broader sense in heavy vehicle, off-road, ag, those are all things that I feel is opportunity. It's just not where we're focused on right now with the inning that we're in and the transformation.
Great. Thank you.
Yep.
Jen, how much of the customer expansion beyond the core Detroit Three and some Hyundai-Kia business that you have is based on this automation? How much proving do you need to do to the Toyotas and the Hondas of the world, particularly in North America, that you have this capability to scale at cost, to be able to handle their business? What does that process look like?
Yeah, I think it's important, but I think it's more important on how we're proving our capabilities in the product area from a technical sales standpoint, and then the capabilities around quality and automation and competitiveness come after that. Automotive, the way you win in automotive is to make sure that you've got a value offering for your customers that nobody else has, and it's typically then driven by the technical sales relationships with the engineering. As we think about diversifying our customer base, we're really focused upfront in the technical offering, and then that follows with making sure we have a competitive cost structure.
I would imagine that's been a good part of your hiring as well since you joined, was this technology and innovation base relative to where it was?
Yeah, it's been a balance. We've got really, really good engineers. I reflected on the basics that we've installed from an operating standpoint. Quarter one, we were implementing a budget to actual review every month, which didn't exist. To survive in automotive for 30 years without those fundamentals, there had to be something special in the business, and I really relate that to the engineers and the technology, and the customer relationships. We have added some resources from an innovation standpoint, because they had looked at patents and technology as a cost to the business, not an enabler to drive future revenue. We are continuing to look across all functions, Brian, as we look at increasing our capabilities.
The engineers, though, we just need to help them a little bit, look at how do they take the great things that they've done and work with the customers in a different way to really differentiate ourselves.
Walter. Got one coming.
In the last 50 years, the automotive industry has been marked by all sorts of M&A and combining, uncombining, spinning off, doing other stuff. You are significantly the smallest enterprise value at this conference. There is a tide which is going out, which I am very comfortable being confident I'm right, that's probably redundant, that small, less, lower capitalization companies, interested institutional shareholder base is shrinking. It's just a fact of life. It seems to me that somewhere in the next 10 years, using your 10 years, this company will get bought by somebody, or should get bought by somebody, as the way to maximize shareholder value. If that is correct, and you've done a spectacular, not good, spectacular job, it should be a case study, in turning the business around, why is, in capital allocation, shrinking the share base not a higher priority?
Because the value of what the business would be in your scenario, that we would be bought, is greater if we have more scale and more long-term opportunity. There is a risk profile of the business when you're so concentrated in a customer base, because if you look at, I know MEMA was presenting yesterday, and I'm on the board of MEMA as well. If you look at the share gains and losses over the last 10 years, the domestic three have continued to lose share in the global market. It then becomes a little bit of a melting ice cube. I do feel that really is a balance of what we've been looking at as we think about capital allocation. It's not an and/or, it's a complement. It's a how do we invest organically? How do we get scale and diversification?
Part of that may come through inorganic, but also, how do we continue to return capital to our shareholders?
Just thinking about your operations.
That was a tough question, Walter.
That's the only kind he has. No softballs from him. Thinking about your operations, you are predominantly Mexico. Matt, just as a reminder for the audience or an introduction, what does a move in the peso mean for your operations, and what sort of challenges do you kind of face going forward, given trade, given the FX moves, and given some of the operational challenges that you're trying to overcome?
Yeah, just to give you perspective, a 5% movement in the peso is roughly about $4 million on an annual impact, so about $1 million on a quarterly basis. We do enter into peso forward contracts to try and hedge that or to smooth out the impact of the currency. Obviously, the biggest piece of our spend in Mexico is labor, so we have been reducing our labor with some of the restructuring actions that we have taken. But we still think Mexico and a balanced approach on footprint makes sense for us longer- term. We have got operations in Milwaukee, a distribution center in El Paso, and then the plants in Mexico.
And to be clear, everything you do is covered under USMCA?
Yeah. 96% of our product is covered under USMCA. Roughly 60% of the product that is final assemble in Mexico comes back to a U.S. production site. The rest of it goes to Mexico, Canada, Korea, a little bit to European countries.
Yeah. This is more of a near-term question, but I guess it speaks to how you plan. You have got one customer in particular that is dealing with quite a bit of inventory in some of their larger products that are some of the higher-margin products that you sell. How do you go about planning for potential line downtime in order for a customer to have to reduce some of their inventory? How flexible can you make your lines to potentially move some of that production into other areas?
Yeah. Right now, our assembly processes are pretty dedicated to a customer and a program, but we don't necessarily run a full operating shift on each assembly line, so we move our labor around to adjust for adjustments in production schedules. We do have inefficiencies in the business still in our supply chain. Matt talked about supply chain stabilization in our suppliers, but the fundamentals around our supply inventory operational planning still are in early stages of transformation. When we think about opportunities, we actually talked a lot about the opportunities in automation, but fundamentally, we still have inefficiencies in the business with expedited freight that come along with better planning processes that help us then react to what you were talking about, changes in production schedules.
I would say, while there is time that gets dropped out for inventory and things like that, for the most part, the customers we serve give pretty solid demand signals and good communication around when they're going to make those changes that allow us to better react from a production planning standpoint to those changes.
Appreciate that. We're bumping up on the half hour. Thank you both for being here. Deb, thank you for coming, injured as you are. Don't get in any more bar fights. It's always great to have you, and best of luck for this coming fiscal year.
Yeah. Thank you very much.
Thank you.