Craig Gates: So we’ve always said we could be at 9%. We’ve been there every now and then. But again, it’s one damn thing after another. But we believe 9% is achievable and should be able to get there.
Craig Gates: Okay. And then Brett, a quick question on OpEx. OpEx is pretty low this quarter. Is there some explanation for that? Or…
Brett Larsen: There was a small gain on insurance. I think it was $300,000 or $400,000, George, which dropped overall OpEx. My expectation is OpEx should be fairly flat in our second quarter.
George Melas: Okay. But if we can adjust SG&A, to simplify to make it easier to think about it, it was 5.8% this quarter. Is that a red rate…
Brett Larsen: Let’s see here. You’ve got SG&A of 5.8. Last year, it was roughly 5.7. Sequentially, it’s down quite a bit. In our Q4, as we had mentioned, there was some bonus calculation that went through the quarter that propped up Q4. But my expectation is that Q2 should be flat to Q1 and a slight increase in Q3 and Q4 of G&A.
George Melas: Okay. Great. Okay. Thanks for that guys. Appreciate.
Brett Larsen: Thank you.
Operator: And we’ll take a question from Bill Dezellem with Tieton Capital.
Bill Dezellem: Thank you. I want to come back to the inventory turns for just a moment. If we roll the clock back a decade back in 2013, and Inventory turns were up north of that north of 6x even up into the 7s. Pardon me for lack of memory here, what is different or what was different back in 2013?
Craig Gates: Fewer customers, and you had an infinite supply of parts…
Bill Dezellem: Whereas now the supply chain and the challenge of getting parts in the door has created havoc.
Craig Gates: Yes. And we’re suffering and from the company’s inventory position has kind of got long COVID in that what happened during COVID has taken almost until now. In fact, we still have some parts around that are a result of COVID. So what happened during COVID, we’re still working our way through. And we’ve talked about this before, is that back in the teens, you could get just about any part you wanted in six weeks. And so the MRP systems were all designed to run with that as one of the variables. And then when COVID hit, it was the opposite of that. And none of the MRP systems actually had that as they’re governing variable, I shouldn’t say none. I’m sure there were some somewhere, but our certainly didn’t and a lot of our customers didn’t, and so that’s what drove our inventory turns down as low as they went and that’s why we’re thinking we can get them back up to six even with more customers and longer lead times for parts.
Bill Dezellem: And Craig, you may have just touched on something that you had mentioned much earlier in the call relative to system upgrades. And I think you referenced your system upgrades and maybe even customer system upgrades. Does this all tie into what you’re talking about right now? Or are those two totally different things?
Craig Gates: No, that’s exactly the same thing.
Bill Dezellem: And so the upgrades that took place in the systems that are planning out inventory is making the lead time actually a variable rather than a constant?
Craig Gates: The lead time always was a variable, but it wasn’t driving the algorithms as if it was a constraint as much as it should have been. More importantly, the way people understood the system and manage those lead times, we’re not driving the system the way it should be working. So I’m not going to go into it. You can call me later, and I’ll give you an MRP lesson if you want. But the bottom line is that the way we use the system and the way we’ve configured the system is much different than it was before we went into COVID. And the way many of our customers configure and use their system now is much different than it was before we went into COVID. I’ll try to give you an example. So when we were in the midst of COVID, it took almost a year for many of our customers to actually revamp their thinking and realize that it wasn’t a possibility to call us up and threaten and yell and abuse and become the squeaky wheel and get their parts.
And that used to work. And so it was a big eye-opener for many customers that there was actually nothing that could fix this other than time. And no amount of yelling or degrading or threats or payments, some type of speed up payment, none of that was going to work. And that was a massive realization for everybody in the industry that has spent many of them their entire careers operating under the assumption that you could always get your parts in at least utmost eight weeks if you made enough noise. And so if you then take the ramifications of that and spread them back through the planning process and the algorithms that you use in your planning process, that’s a profound change in thinking.
Bill Dezellem: That’s helpful. And then you referenced the customer systems, is your sense that the customer systems, generally speaking, have now taken this into account. And so kind of that heavy lifting is done?
Craig Gates: Yes. Many, many of our customers are now investing money in having us stockpile, some of the troublesome components for them. That was people used to give that lip service before COVID, but I can’t think of anybody that actually did that before COVID. Even though we would talk about it every time there was an event when they couldn’t get a product and they needed it, and there would be this kind of relationship, challenging situation, and we’d be yelling at each other on the phone and we’d be flying out to see each other, and we talk about, God damn, if we would just take these scary parts, I remember the title, we had a scary parts list. And so if we just take the scary parts that are on this list, and you guys would invest $100,000 out of your $40 million spend.
If you put $100,000 into this, you guys wouldn’t have the situation crop up again and again and again. And the response was always was, we’re not going to do it, you do it. And we always say, well, we can’t afford to do it, you do it and then it would never get done. That has changed. We’ve probably got 30%, 40% of our customers who are in some type of standby inventory situation with us where they have realized that in order to ensure their supply chain, they need to invest wisely in one, two, three or four parts that are their customary problem parts on their bill of material. That’s a really big change.
