Methode Electronics, Inc.

Welcome to the Method Electronics Fiscal Year 2020 Third Quarter Conference Call. For this quarterly conference call, the company has prepared a PowerPoint presentation entitled Fiscal 2020 Second Quarter Earnings, which can be found at method.com in the Investor Relations section. As a reminder, this conference is being recorded. This conference call does contain forward-looking statements which reflect management's expectations regarding future events and operating performances and speaks only as of the date hereof. These forward-looking statements are subject to a safe harbor protection provided under the securities law. Method undertakes no duty to update any forward-looking statements to conform the statements to actual results or changes in methods, expectations on a quarterly basis or otherwise. Forward-looking statements in this conference call involve a number of risks and uncertainties. The factors that cause these actual results to differ materially from our expectations are detailed in methods filings with the Securities and Exchange Commission, such as our annual and quarterly reports. Such factors may include without limitation the following. Dependence on a small number of large customers, including two large automotive customers, Dependence on Automotive, Appliance, Commercial Vehicle, Computer, and Communications Industries International Trade Disputes Resulting in Tariffs and Our Ability to Mitigate Tariffs Potential Impact from Coronavirus Outbreak Timing, Quality, and Cost of New Program Launches Ability to withstand price pressure, including pricing reductions Ability to successfully Market and Sell De Beers Surfaces Products Currency Fluctuations Customary Risks Related to Conducting Global Operations Ability to Withstand Business Interruptions Recognition of Goodwill Impairment Charges Ability to Successfully Benefit from Acquisitions and Divestitures Investment in Programs Prior to the Recognition of Revenue Dependence on the ability and price of materials, fluctuation in our gross margins, dependence on our supply chain, income tax rate fluctuations, ability to keep pace with rapid technology changes, breaches in our information technology systems, ability to avoid design or manufacturing defects, ability to compete effectively, Ability to protect our intellectual property, success in GRACON or our ability to implement and profit from new applications of the acquired technology, significant adjustments to expense based on the probability of meeting certain performance levels in our long-term incentive plan, ability to manage our debt levels and any restrictions there under and Cost and Expenses Due to Regulations Regarding Conflict Minerals. At this time, I'd like to turn the conference over to Mr. Don Duda, President and CEO. Sir, the floor is yours.

Thank you, Tom, and good morning, everyone. Thank you for joining us today for our fiscal 2020 third quarter financial results conference call. I'm joined today by Ron Zumis, our Chief Financial Officer, Both Ron and I have comments and afterwards we will take your questions. Before I comment, I would like to note that our fiscal third quarter accounting period includes 14 weeks versus 13 weeks for the same period of fiscal 2019 and 40 weeks in the nine month accounting period ending February 1st, 2020 versus 39 weeks for the same period of fiscal 2019. Also, the fiscal 2020 year-to-date third quarter results include nine months of GRAECON activity as compared to four and a half months of GRAECON activity in fiscal 2019 year-to-date results. To start, please turn to slide four. Methods year-to-date revenue increased 10.8%. Our net income increased 35.2%. and our diluted earnings per share increased 35% from the nine months ended February 1st of this fiscal year. On a non-GAAP basis, our adjusted net income increased 4.5% and adjusted diluted earnings per share is up 4.3%. These values exclude expenses for initiatives to reduce overall costs and improve operational profitability. Acquisition related costs, including purchase accounting adjustments, and long-term incentive plan accrual adjustments in the applicable periods. As you can see on slide five, our year-to-date revenue performance, which includes the adverse effect from the UAW labor strike at GM that occurred in our second quarter. Year-to-date performance benefited from an extra four and a half months of Greycon activity and benefited from our new program launches and higher sales volumes of sensors and switches, which have offset the customer delayed launch in our touch sensor unit, as well as the negative effects from foreign currency exchange. Our performance to date and our anticipated lower consolidated tax rate allows us to reaffirm our fiscal year guidance numbers as reported during our second quarter fiscal year 2020 earnings call and is shown on slide six. During the third quarter, new business wins and business development efforts in the automotive and industrial segments continue to capitalize on important vehicle trends, including electrification, LED lighting, and incorporation of sensors to augment safety. We are very pleased with our bookings of approximately $105 million in new and annual business thus far this fiscal year. Referring to slide seven in the quarter, Method has been awarded a torque sensor and complex insert motor product for the power steering system of an all-terrain sport recreation vehicle worth $12 million annually. Our sensor detects the efforts the driver is exerting while steering the vehicle and allows the system to adjust its power steering assistance in real time. We have secured additional steering angle sensor business with an automotive OEM for $4 million annually. Our LED lighting solutions business continues to grow with several program wins including overhead council lamps, puddle lamps, and license plate lamps for automotive and strip lighting system for the interior lighting for a bus manufacturer. Methods Power Solutions Group continues to an electric vehicle and hybrid electric vehicle business as well as new awards in the data center equipment space. Moving on, I want to comment on the latest automotive trend of a center display increasing in size and moving to smart services with more control functions being integrated into the display itself, such as infotainment. We anticipate in the future there will be fewer interior designs using traditional buttons and knobs. And perhaps more importantly, we expect this trend will result in much lower average selling prices for any integrated center assembly that is awarded. As it would be inappropriate for me to speculate about any of our customer-specific plans for the future platforms, and while we expect no effect on our business in the near term, we want to mention that based on our multi-year planning at this point, we expect this transition will indeed occur and expect there will be less integrated center stack units in our business mix over the next five years. However, as we've done successfully in the past, Methode has evolved its business with new technology and products, such as our unique sensors, interior and exterior LED lighting, our power solutions for electric vehicles, and we will continue to develop innovative user interfaces such as overhead consoles, digital clusters, et cetera. Thus, we feel that going forward, our higher margin product links will more than offset any potential client and operating income from what we must now consider a legacy product. I believe the aforementioned year-to-date bookings demonstrate our success in these areas. Turning to slide eight. I'm excited to mention that our new engineering center located in Bangalore, India has been completed and our personnel moving from our previous location have settled in. We constructed this 50,000 square foot state-of-the-art facility for our 165 associates, adding testing capabilities as well as having space to house additional personnel as methods engineering needs expand with our business growth. Moving to slide 9, our sensor group continues with its development and commercialization of total load sensor systems based on methods of magnetic elastic technology. Some key engineering assessments are now complete, and we expect to supply engineering samples to a customer within the next few months. As noticed previously, we are targeting light truck and commercial OEMs to implement the benefits that can be derived from this sensor when driving vehicles with trailers. In the third quarter at DeBeer, we added eight new customers and completed six hospital evaluations and have three evaluations in process with several planned for the next quarter. Also, our battery-operated Gen 2 controller should be available by the end of this fiscal year. As many of you are aware, our Hettronic business unit has been in litigation with a former reseller of Hettronic's products. A jury trial conducted in Oklahoma City, where Electronics International Headquarters are located, concluded this week. The jury decided in our favor and awarded compensatory and punitive damages of approximately $114 million. Obviously, the jury verdict is a great development that we are excited about. While the amount of the verdict is substantial, the judgment isn't final. and we don't know whether there will be any adjustments to the amounts awarded by the jury as part of the final judgment or how long it will take for a final judgment to be entered. In addition, defendants can appeal after the final judgment is entered. Once we have final judgment, we will work with counsel to implement the verdict and begin collection efforts, though I caution there is no guarantee that the company will be able to collect or win, particularly in light of the fact that all of the defendants are located outside the United States. Moving on, and to conclude, given the global macro environment and significant headwinds faced by Methyl throughout its fiscal year, I am pleased that our third quarter performance, largely based on organic growth fueled by new program launches and our sensor business, led to solid financial performance and, aided by excellent cash generation, we continue to deleverage, reducing debt by over $100 million since the Greycon acquisition. That said, we remain cautious and mindful of the coronavirus situation. At this point, I'll turn the call over to Ron, who will provide more detail on our financial results. Ron?

Thank you, Don, and good morning, everyone. As was mentioned in both the 10Q and the press release, fiscal year 20 third quarter results include 14 weeks of activity as opposed to 13 weeks in the third quarter of fiscal 19. And fiscal year to date, 20 third quarter results include 40 weeks of activity as opposed to 39 weeks in the fiscal 19 year-to-date third quarter figures. Also fiscal year 20 year-to-date third quarter results include nine months of gray connectivity as compared to four and a half months in fiscal 19 year-to-date results. Please turn to slide 10. Third quarter sales increased 15.8% or $39 million to $285.9 million in fiscal 20 from $246.9 million in fiscal 19. Sales in the third quarter benefited from higher sales in the automotive segment. Foreign currency exchange continued to be a headwind as both the Euro and RMB exchange rates were weaker than the prior year, reducing net sales in the quarter by $2.2 million. On a gap basis, third quarter net income increased $10.5 million to $41.2 million, or $1.09 per share, from $30.7 million, or $0.82 per share, in the same period last year. Third quarter gap net income benefited from higher gross profit, lower interest and amortization expense offset by higher income tax expense. In addition, we realized benefits from initiatives to reduce costs and improve profitability taken in fiscal 2019, which included lower expense for those actions in the current fiscal year versus last fiscal year. Moving to margins on slide 11. Third quarter GAAP gross margins were higher, but non-GAAP adjusted gross margins were flat year over year in fiscal 20. Third quarter GAAP gross margins benefited from increased automotive and sensor sales, but were negatively impacted by foreign currency translation and lower radio remote control and appliance product sales. Non-GAAP adjusted gross margins exclude expenses for initiatives to reduce costs and improve profitability and purchase accounting adjustments in the applicable periods. Third quarter GAAP selling and administrative expenses as a percentage of sales decreased 180 basis points year over year, favorably impacted by lower expense for operational improvements, the benefit of those operational improvements, lower acquisition costs and lower stock-based compensation expense. Non-GAAP selling and administrative expenses as a percentage of sales, which exclude acquisition-related costs, expense for operational improvements, and related costs in the applicable periods, decreased 120 basis points year-over-year in the third quarter of fiscal 20. Moving to year-to-date margins on slide 12, Year-to-date GAAP gross margins improved by 90 basis points, but non-GAAP-adjusted gross margins declined 20 basis points year-over-year. Gross margins were impacted by the UAW labor strike at GM, the negative impact of foreign currency translation, and lower radio remote control and appliance product sales. These items were partially offset by the benefit of a full year of gray-con sales and increased sensor sales. Non-GAAP adjusted gross margins exclude expenses for initiatives to reduce costs and improve profitability and purchase accounting adjustments in the applicable periods. Year-to-date GAAP selling and administrative expenses as a percentage of sales decreased 290 basis points year-over-year, positively impacted by the lower expense for operational improvements, the benefit of those operational improvements, lower acquisition costs, Lower stock-based compensation expense and by selling and administrative expense attributed to GRAECON, which is lower as a percentage of sales than method as a whole. Non-GAAP selling and administrative expenses as a percentage of sales, which excludes acquisition-related costs, expense for operational improvements, and stock-based compensation adjustments, slightly decreased by 30 basis points on a year-to-date basis. Shifting to EBITDA on slide 13. The company generated $58.7 million in fiscal 23rd quarter versus $43.1 million in the same period last year. Adjusting for expenses for initiatives to reduce overall costs and improve operational profitability and acquisition-related costs in the applicable periods, Third quarter fiscal 19 adjusted EBITDA was $49.5 million compared to $59.8 million in the current period. The increase is primarily attributable to higher gross profit during the period. Moving to year-to-date EBITDA on slide 14, the company generated $152.6 million in fiscal 20 versus $109.1 million in the same period last year. Adjusting for expenses for initiatives to reduce overall costs and improve operational profitability, acquisition-related costs and stock-based compensation accrual adjustments in the applicable periods, fiscal 19 adjusted EBITDA was $137.6 million compared to $154.2 million in the current year period. The improvement is primarily attributable to higher EBITDA from GRAECON, nine months of activity versus four and a half months, Partially offset by the adverse impact from the UAW labor strike at GM. A few other financial items to review. Year-over-year intangible asset amortization expense in fiscal 20 increased $3.2 million, or 28.8%, to $14.3 million due to amortization expense related to the Greycon acquisition. partially offset by lower amortization in the interface segment. In fiscal 20, we invested approximately $35 million in capital expenditures, mainly to support programs and launches in North America and Europe and our facility expansion in India. Your to date depreciation expense for fiscal 20 was $21.7 million. Our year-to-date tax rate of 14.1% benefited from the favorable adjustments due to U.S. tax reform from IRS regulations that were issued in December 2019. Excluding this impact, our year-to-date tax rate would have been approximately 17%. We anticipate the tax rate for the fiscal year to be approximately 16%, assuming no additional discrete items in the fourth quarter. Let's move to slide 15. Free cash flow for fiscal 20 was $94.4 million. As shown on slide 16, we have used some of our free cash flow to pay down debt. We paid down nearly $36 million in debt since the beginning of the fiscal year, and since the acquisition of Greycon, we've reduced our gross debt by $101 million. We ended the quarter with $80 million in cash, and our debt-to-EBITDA ratio, which is used for our bank covenants, stands at approximately 1.3%. Please move to slide 17 to look at our key drivers to our anticipated EBITDA performance for fiscal 20. Looking at the EBITDA base on our $155 million of EBITDA in fiscal 19 and adding the EBITDA from a full year at Raycon, which is approximately $25 million, adding EBITDA from new automotive and laundry program launches of about $16 million, Adding back the one-time costs we incurred in fiscal 19 for initiatives to reduce costs and improve profitability of about $11 million. Adding back the one-time costs we incurred in fiscal 19 for acquisitions and restructuring of about $29 million. And increasing our anticipated government grant income by $4 million. and subtracting the net impact from the UAW labor strike at GM of approximately 7 million and subtracting the impact of the loss of EBITDA from reduced passenger car sales and other items, which we estimate to be around 12 million. At this juncture, we believe there are more headwinds than tailwinds in the fourth quarter of fiscal 20, including the potential impact of coronavirus. In conclusion, I'll finish up my remarks with guidance. Please turn back to slide 6. As a reminder, the guidance ranges for Fiscal 20 are based upon management's expectations regarding a variety of factors and involve a number of risks and uncertainties which have been detailed in this morning's release, Form 10-Q, and our Fiscal 19, Form 10-K. As we announced this morning, we reaffirmed Fiscal 20 sales guidance in the range of $1.1 to $1.13 billion. Pre-tax income in the range of $150.3 to $164.3 million and earnings per share in the range of $3.25 per share to $3.55 per share. For fiscal 20, we are estimated capital investment to be in the $45 to $50 million range and depreciation and amortization to be between $49 and $50 million. Finally, we expect fiscal 20 free cash flow, as defined as net income plus depreciation and amortization, less capital expenditures, to be between 122 and 136 million. Don, that concludes my comments. Don, thank you very much.