Strattec Security Corp 17th Annual Midwest IDEAS Conference

Thank you. Good morning, everybody. We will start with the standard safe harbor statement that just covers any forward-looking statements that I may be making during the presentation today. For those of you who are not familiar with Strattec, we have been a public company since 1995. We are about 89% institutional ownership with 4 million shares outstanding. On the right-hand side, you can see we have a very diverse product portfolio, which I will spend a little bit more time talking about in subsequent slides. Our sales by customer is primarily trending towards the domestic Detroit customers. So 65% of our sales are with Ford, General Motors, and Stellantis. Our product sales are relatively balanced. We have got our headquarters in Milwaukee, Wisconsin, which I just said the drive with traffic yesterday was horrible. In our headquarters, we have got some sales, engineering, manufacturing. We have got stamping, die-cast, and plating capability.

We have our commercial-facing location in Auburn Hills, Michigan, with sales, engineering, testing, and all of our development. Then we have four manufacturing facilities in Mexico, three in Juarez, one in León. In Juarez, we have got engineering, testing, light assembly, and some printed circuit board manufacturing. Then in León, we have got injection mold assembly and painting. Our León facility is part of our joint venture with ADAC. Then we have got distribution in El Paso, Texas, for our customers. From a product perspective, our products are organized around three pillars. Permission, which is our traditional lock and key business. That is really where the company started. We also have our joint venture business under Permission, which is handles. From a technology standpoint, we are working on next generation key fobs, which is a digital key fob.

There has been a lot of discussion on, are key fobs going away as you get more use with your phone? But what we found is from a security and a transferability standpoint, consumers still want their key fobs. The difference is a key fob is changing from an RFID technology to an ultra-wideband technology that works with the next generation electrical vehicle architectures. The importance of that really is from a security standpoint and a consumer functionality. From our motion products, our motion products are primarily supporting all rear access for vehicles, as well as power sliding doors. This is actuators that work with electrical, mechanical, and software to make sure the functionality from a consumer is there from an access standpoint for their vehicle. Then hold is latches. This is from more manual latches in rear access and your hood latches to cinching latches that as you close your vehicle door, the latch actually helps close your door.

I talked about our capabilities already, but this just shows the wide range of capabilities we have. One thing that is not on this slide is our software capabilities. Like I said, our products are mechanical in nature and electrical, but we also have software that works across all of our products, which is of benefit to our customers as there are more complicated software architectures that are coming out in vehicles as vehicles continue to progress. We have been under a transformation. I say this a lot. I am a hockey fan. Deb, our IR person, tells me I have to talk about baseball, which is a little bit harder for me.

Some days I feel like we are in a double header, but I think this is really important to talk about because we really are still in the early stages of a transformation. From a legacy standpoint, the business was not necessarily running from an operational standpoint that you would expect in the automotive industry. There has been a lot of opportunity over the past two years that we have been able to capture, but there is a lot more opportunity in the business as we look at our margins. Where we want to be from a company standpoint is we want a more diverse set of customers. We want to continue to build scale, and we want a more stable and predictable business with greater customer diversification, if I did not say that.

I think it is important for those of you who may not be aware of the automotive industry to talk a little bit about, it is a very long cycle business. Where Strattec had traditionally played with the customers was in the RFQ stage, which is in the middle of this slide here. That is really when a request for quote is coming to a supplier and you are responding to that, and then it is two to three years till that vehicle is launched.

Because our products are so specialized and really to make sure that we are informed on our product portfolios, the best place for us to work is really in that early customer engagement, and we have been spending a lot of time in the organization to shift our focus earlier with our customers to make sure that we are providing the right technology that they need for their vehicles well ahead of an RFQ. We are doing that with the customers that we have traditionally supported, but we are also working on a broader set of customers in North America, because while I talked about 65% is with Ford, GM, and Stellantis, that is a relatively smaller part of total North America production. If you think about North America production and you look forward to our fiscal year 2027, North America production is expected to decline by 2%.

Our addressable customers are going to decline by 6%, but there's still a lot of opportunity for vehicles that are built in the market that our products apply to. As more and more customers look at regional sourcing strategies, that's an opportunity for us as we think about organic growth. I talked about the transformation. We've done a lot already, and there's still more to do. Our strategic pillars really have been about making sure we have the right team and capabilities, driving our operational excellence, thinking about our value proposition, and modernizing our operations. From a team standpoint, we've injected new talent across the organization. We have a full new executive team, and what we're really now in process of is understanding where we may have capability gaps further down in the organization and making sure we have the right capability in the right places.

Another opportunity for us is it was a very siloed organization. What I mean by that is when I joined, I talked about where our footprint is. The leaders in those individual sites actually had never been together in the same room. If you think about the opportunity to collaborate across the business, it's a huge opportunity for our leaders to get together to make sure we're aligned on the strategic pillars. With that, we rebranded the company earlier this year, and we also rebranded our culture pillars to focus around innovation, collaboration, and accountability. From an operational excellence standpoint, we've reduced our headcount by 21% over the past two years. That realized $9.5 million of savings. We're continuing to look at where we have opportunities, specifically around automation. This past year, we focused on simple automation.

We automated 16 individual stations, but that only brings our automation level up to 9%, so we still have a tremendous opportunity in automation. From a value proposition standpoint, I talked about rebranding the company, but we also realized $15.6 million in pricing. Now, there is still pricing, but we got a lot of the larger low-hanging fruit, so we don't expect that the pricing opportunity will be as big going forward as it has been over the past two years. I talked about how important it is to build our customer diversification and upfront relationships. Modernizing our operations has been a big focus for us as well. It says down on the bottom, "In process, enhancing IT capabilities." We were very low IT tech when I started, thinking about paper expense reports, signing up for benefits on paper.

I'm happy to say that we now are automated for both of those things. If you think about the efficiency of the business, we have so much opportunity there still to continue to modernize our operations. Our Milwaukee headquarters is about 350,000 sq ft. We've got our salaried staff and we have operations. We're only using about half of that space. With where our process flow is, we've freed up about 91,000 of space in our Milwaukee headquarters already, and we're continuing to look at what is our right footprint for where we need to be longer term. Good work that's been done, lots of opportunities still to come. From a financial perspective, I talked about net sales following automotive production. In the quarter, we were relatively flat from prior year.

We did have $1.4 million of pricing benefits that was offset by program cancellations from electric vehicles from our customers. We are really past that now for the impact that we will see from a year-over-year standpoint. From a gross margin standpoint, as I talked about, we have seen good improvement in our gross margin. Our gross margin expanded to 16.5% from 15% FY 2026 to FY 2025. That was really driven by $9.5 million in pricing. We have had the restructuring savings, and then the offset there was FX. We have seen pressure in FX specifically this year, and we are expecting a bit more pressure from a gross margin standpoint as we move into next year. Our SG&A expenses increased $7 million to 11.9% of sales. $3.3 million of that was an increase in salaries and benefits.

We had some incremental spend from business transformation restructuring and executive transition costs, and that was partially offset by half a million in restructuring savings and then recovery from those program EV cancellations. We really expect our SG&A to be about 11%-12% as we go forward. We are making sure that we are balancing in the investment that we need to facilitate the transformation with a focus on making sure we have got the right cost structure there as we move forward. From an earnings power standpoint, our net income grew 10%, and it really validates the impact of the transformation actions ahead of some of the macro challenges that we have had with the negative FX impact of $4.8 million. Our adjusted diluted EPS, which was a result in our pricing and a reduction in manufacturing costs, grew from $5.38 to $6.88.