Craig Gates: Well, my biggest indicator is how many of our top customers are pushing flat or pulling in. And right now, we don’t see — well, we see one large customer that has pulled in based on penetrating a new geographical market with their product. So if you kind of push that aside, as [Germaine] (ph) to this discussion, we see nobody pulling in. Those who are not pushing out are remaining flat. And we’re slightly below half of our large customers that are pushing out. Nobody is in panic mode. Nobody is freaking out and trying to cancel the next year’s production. But I don’t see our customers feeling as cheerful as the Fed thinks they should.
Bill Dezellem: And Craig, is there any common thread between the products that you are having forecast pushed out on?
Craig Gates: No, not really that I can discern. I’ve been looking at and thinking about it because I need to figure out if it’s going to spread or if it’s going to be contained or if it’s going to shrink. So I can’t find any type of thread and say, okay, this market is going to get hurt and this one is going to be okay.
Bill Dezellem: And relative to inventory levels, do you have any sense of whether these customers that are pushing out production, whether they are actually seeing a demand change or whether there’s just simply inventory adjustments taking place in the system now?
Craig Gates: Well, that’s — I’m not sure I can answer that question because I think — well, inventory as a result of forecast, so they could have been comfortable with $10 million in inventory a quarter ago and now they’re not because their forecast dipped. So the two aren’t really — they’re not really separable as variables. We see people who are exactly that. They used to be comfortable and wanted to carry X million because their forecast continued to look strong and now their forecast has gotten weaker and they’re trying to trim their inventories in relation to their forecasts. So it’s — that’s the way it works, is stuff starts slowing down as far as what’s passing through their channels, your sales guys get worried, they start dropping their forecasts and the procurement folks have to decide what they should be carrying inventory and then they drop their orders to us. So all three of that stuff just happens in the chain. It’s not unrelated.
Bill Dezellem: All right. I’m going to, kind of just one.
Brett Larsen: Go ahead, Craig.
Craig Gates: I didn’t say a word.
Bill Dezellem: All right. My apologies. I get to comment this from one different angle. We have seen a couple of cases where businesses are lowering their inventory levels simply because the supply chain and procurement is improving. And so they’re feeling more confident with lower levels of inventory. It has nothing to do with their end demand forecast. How does that enter into what your customers are doing?
Craig Gates: Okay. Now I understand what you’re asking. Sorry, it took me so long to get it.
Bill Dezellem: Craig. I actually was asking all the other pieces also. So you’re good.
Craig Gates: Okay. So I don’t think that is a very big factor in what we’re seeing. It’s — in fact, every one of the ones I know of are due to slow in sell-through rather than increased confidence in supply chain. The — and Brett’s writing me out notes and sticking them in front of me. So this just in, we do see — we’re getting a lot more freaked out about cost of capital as they should. So inventory levels are being scrutinized a lot harder by our customers since they cost so much more.
Bill Dezellem: And how can you use that to your advantage in terms of your inventories and/or accounts receivable?
Craig Gates: Well, part of the way we can use it is kind of the corollary to your question about people dropping inventories based on confidence in the supply chain. So the discussions go along the fact of, okay, we helped you, we brought in a lot of inventory, we shared in the cost, and now it’s time that we need to hack this inventory, and we should be able to, since the supply chain is getting better, so we aren’t going to go order [account] (ph) anymore. And if you still want us to, if you’re still nervous, you’re going to have to fund us to order an account for you. So it becomes more of a conversation on, you all are still nervous, and you’re making this decision that will cost Key Tronic money. We don’t think it’s justified. We’re happy to do it, but you’re going to have to back us financially. So that’s helping us in that respect.
Bill Dezellem: Has that process begun? And if so, kind of how has the outcomes come with that?
Craig Gates: Well, you saw that we had $16.8 million, I think it was a reduction in inventory, and that’s certainly a part of that number, and it should continue, albeit at a slower pace, but we should be continuing to drive inventory out of this business, partially due to the improvements that we’ve made in our ability in IT to manage this massive, massive beast of all these different part numbers and partly due to the fact that a lot of our customers have become a lot more cognizant and willing to discuss inventory turns as a part of business. And it has started, that’s where part of the $16.8 million came from.
Bill Dezellem: Excellent. Thank you for all of the perspective. And Brett, thank you for the newsflash.
Brett Larsen: You bet.
Operator: And our next question comes from the line of George Melas with MKH Management. Please go ahead.
George Melas: [indiscernible] Just to follow up on Bill’s question. You reduced your inventory partly because we use them. But I think you were suggesting that partly is because you were able to put some of that inventory on the customers’ book. Is that a right interpretation of what you said?
Brett Larsen: Yes.
George Melas: Okay. And how many customers or maybe, let’s say, what percentage of your customers are you able to have these discussions with some positive outcome?
Craig Gates: Actually quite a large amount.
Brett Larsen: I would say the majority, George.
George Melas: Really? Okay. That’s fantastic. That’s great to hear that. Okay. Quick question on the gross margin. For the last three years, it’s been roughly 8.1%, been consistently at 8.1%. And in the second half of this year, it was at 8.6%, partly because of higher revenue. But is there something structurally that should lead us to have gross margins in the high 8s or in the [9s] (ph)?
