Methode Electronics, Inc.

Please stand by. Good day, ladies and gentlemen, and welcome to the Method Electronics fourth quarter fiscal 2020 results call. After the presentation, there will be a question and answer session. If you should require assistance during the call, please press star zero and an operator will assist you. At this time, it's my pleasure to turn the floor over to Mr. Rob Cherry, Vice President of Investor Relations. Sir, the floor is yours.

Thank you, operator. Good morning, and welcome to Metho Electronics Fiscal Year 2020 Fourth Quarter Earnings Conference Call. For this call, we have prepared a presentation entitled Fiscal 2020 Fourth Quarter and Full Year Financial Results, which can be viewed on the webcast of this call or found at metho.com in the Investors section. This conference call contains certain forward-looking statements. which reflect management's expectations regarding future events and operating performance and speak only as of the date hereof. These forward-looking statements are subject to the safe harbor protection provided under the securities laws. Method owner takes no duty to update any forward-looking statement to conform the statement to actual results or changes in method's expectations on a quarterly basis or otherwise. The forward-looking statements in this call involve a number of risks and uncertainties. The factors that could cause actual results to differ materially from expectations are detailed in methods filings with the Securities and Exchange Commission, such as their annual and quarterly reports. Such factors may include, without limitation, the following. Impact from pandemics. such as the COVID-19 pandemic. Dependence on the automotive, appliance, commercial vehicle, computer and communications industries. Dependence on a small number of large customers, including two large automotive customers. International trade disputes resulting in tariffs and our ability to mitigate tariffs. Timing, quality and cost of new program launches. Ability to withstand price pressure, including pricing reductions Failure to attract and retain qualified personnel Ability to successfully market and sell De Beers surface products Currency fluctuations Customary risks related to conducting global operations Costs associated with environmental health and safety regulations Ability to withstand business interruptions Recognition of goodwill and long-lived asset impairment charges Ability to successfully benefit from acquisitions and divestitures Investment in programs prior to the recognition of revenue Dependence on the availability and price of materials Dependence on our supply chain Judgments related to accounting for tax positions Income tax rate fluctuations Ability to keep pace with rapid technological changes Impacts to our information technology systems Ability to avoid design or manufacturing defects Costs associated with reorganization activities Ability to compete effectively Ability to protect our intellectual property Success Upgrade Con and or our ability to implement and profit from new applications of the required technology, significant adjustments to expense related to our performance-based stock awards in our long-term incentive plan, ability to manage our debt levels and any restrictions there under, and impact to interest expense from the placement or modification of LIBOR. At this time, I'd like to turn the call over to Mr. Don Duda, President and Chief Executive Officer.

Thank you, Rob, and welcome to Methode. Good morning, everyone, and thank you for joining us today for our fiscal 2020 fourth quarter and full year financial results conference call. I'm joined today by Ron Zumas, our Chief Financial Officer. Both Ron and I have opening comments, and afterwards, we will take your questions. First, I would like to note that our fiscal 2020 accounting period included 53 weeks versus 52 weeks for fiscal 2019. Also, the fiscal 2020 results include 12 months of GRAECON activity as compared to seven and a half months of GRAECON activity in the fiscal 2019 results. As you can see on slide four, I would also like to draw your attention to our refreshed corporate and investor relations websites. We believe both provide an improved user experience as well as better depth and visibility of information. Please turn to slide five. Methode's full year revenue increased 2.4%, our net income increased 34.7%, and our diluted earnings per share increased 34.2% for the fiscal year ended May 2nd of 2020. All three financial measures were a record for Methode. The cost reduction and operational efficiency initiatives that we implemented in fiscal 2019 provided the savings we expected in fiscal 2020. On a non-GAAP basis, our adjusted net income increased 5.7% and adjusted diluted earnings per share was up 5.4%. These adjusted measures exclude expenses for initiatives to reduce overall costs and improve operational profitability. acquisition-related costs, long-term incentive plan accrual adjustments, and the transition tax benefits from U.S. tax reform in the applicable periods. As you can see, on both a GAAP and adjusted basis, it was a commendable performance for the year that drove record free cash flow, increasing over 48% for fiscal 2019. On slide six is our full-year revenue bridge, which includes the benefit of an extra four and a half months of GRACON activity and $76 million in sales from new program launches. Speaking of GRACON, I am happy to report that we completed the integration and are pleased that the acquisition delivered the results we expected. Adversely affecting the year was the UAW labor strike that occurred in our second quarter and the impact from COVID-19 in the fourth quarter. After the negative impact from foreign currency exchange, the full-year revenue performance was still up approximately $24 million to a record level. In regard to COVID-19, our focus continues to be on the health and safety of our employees who have shown incredible dedication to Method and our customers in light of extraordinary circumstances across the globe. Given this health crisis and business disruption, we have implemented measures to manage costs, preserve liquidity, and most importantly, address employee safety. These safety measures include enhanced cleaning and disinfection procedures at our facilities, the promotion of social distancing, a majority of office staff working from home, and stringent factory and office protocols for proactive COVID-19 mitigation. Method was able to apply the early lessons learned in its Asian operations, developing actions and protocols to deal with COVID-19 and leverage them in our plants and facilities and the rest of the world as the pandemic spread. As a result of these mitigations and given the essential nature of some of our businesses, all of our facilities remained open to a certain degree and operated at levels commensurate with customer orders. In fiscal 2021, we will continue to see significant headwinds, especially in the first quarter from the COVID-19 pandemic. However, I want to stress that we will continue to invest in our businesses for the long term. Moving to slide seven. During the fourth quarter, new awards in the automotive and industrial segments continue to capitalize on important trends including vehicle electrification and the incorporation of LED lighting and sensors to augment safety. We are very pleased that we booked over $36 million in new annual business in the fourth quarter with our total for fiscal 2020 exceeding $141 million. In the quarter, Method was awarded several key programs tied to our ongoing strategy. In electric vehicles, we were awarded programs for bus bars and AC power connectors, totaling $10 million annually. In sensors, we were awarded a program in China for e-bikes for $2.3 million annually. In vehicle exteriors, we were awarded an initial integrated tailgate module program for a Japanese auto OEM for $1.7 million. As we have successfully accomplished in the past, Method will continue to evolve its business with new technology and products such as our unique sensors, LED lighting, and power solutions for electric vehicles. And we will develop innovative products for new applications like remote controls for industrial drones, which is an up-and-coming market for our HITTRONIC business. In the medical segment, Our efforts to grow the DeVere product line in the corridor were hampered by the postponement of elective surgeries due to COVID-19. When the pandemic subsides and hospitals return to normal, we believe that business will return to a growth trajectory. Looking forward, we are not providing annual guidance for fiscal 2021 due to the ongoing market uncertainty and the resulting lack of customer demand visibility due to the COVID-19 pandemic, which includes our fiscal first quarter. Most auto and commercial vehicle production was shut down before the beginning of our fiscal 2021 first quarter until approximately mid-June, or roughly the first half of the quarter. When production did resume, the demand was irregular and we continue to see volatility in forecasts as of today. As such, any quarterly guidance we were to give would be heavily weighted to July and would carry a range of uncertainty that would not provide meaningful insight. While we are not providing any guidance at this time, we do intend to provide partial year guidance at a future date as soon as demand schedules stabilize and we are confident with our customers' forecasts. As part of our continuous improvement strategy and an effort to manage costs and cash, Method is taking further actions to consolidate operations and further streamline our organization in order to improve efficiencies and set the stage for continued growth. These actions will allow us to further improve on our S&A as a pretend of the sales and be in a better position to capitalize on opportunities as they present themselves. To conclude, given the current global macroeconomic situation and the significant headwinds faced by methods throughout this past fiscal year, I am extremely pleased that our strategy and team were able to deliver record revenue and income and generate record free cash flow. That said, our focus now has now turned to continuing to navigate COVID-19 while executing our long-term strategy as we enter a new fiscal year. 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. Please turn to slide eight. Fourth quarter sales decreased 20.8% or $55.4 million to $210.6 million in fiscal 20 from $266 million in fiscal 19. Sales in the fourth quarter were negatively impacted by COVID-19, especially in the mid to late March and April timeframes. These production shutdowns, most of which impacted the automotive and industrial segments, continued through the end of the fiscal fourth quarter and had a negative impact of approximately $85 million on net sales. Foreign currency exchange continued to be a headwind as both the Euro and Renminbi exchange rates were weaker than the prior year, reducing net sales in the quarter by 3.5 million. On a gap basis, fourth quarter net income increased 7.5 million to 30.1 million, or 79 cents per share, from 22.6 million, or 60 cents per share, in the same period last year. Fourth quarter net income benefited from the adjustment of long-term incentive accruals of $6.5 million and higher other income of $5.5 million, primarily due to higher international government grants inclusive of COVID-19 assistance. 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. Adjusted net income, a non-GAAP financial measure, was $25.4 million or $0.67 per diluted share as compared to $23.5 million or $0.62 per diluted share in the same quarter of fiscal 2019. Adjusted net income excluded expenses for initiatives to reduce overall costs and improve operational profitability, acquisition-related costs, and long-term incentive plan accrual adjustments in the applicable periods. Moving to gross margins on slide nine. Fourth quarter gap growth margins were higher in fiscal 20 as compared to fiscal 19 and benefited from the sales mix within the automotive and industrial segments including increased census sales and increased sales in the interface segment, but were negatively impacted by sales volume reductions due to the impact of COVID-19 and foreign currency translation. Non-GAAP adjusted gross margins, a financial measure which excludes expenses for initiatives to reduce costs and improve profitability and purchase accounting adjustments in the applicable period, were higher in fiscal 20 as compared to fiscal 19. Fourth quarter gap in selling and administrative expenses as a percentage of sales decreased 370 basis points year-over-year to 8.6% compared to 12.3% in the fiscal 19 fourth quarter. The fourth quarter figure was attributable to long-term incentive plan accrual adjustments, lower performance-based cash compensation expenses, and lower salary resulted from the COVID-19 cost-saving actions. Adjusted selling and administrative expenses as a percentage of sales, a non-GAAP financial measure, decreased slightly to 11.6% from 12% in the fiscal 2019 fourth quarter. This excluded acquisition-related costs, expenses for initiatives to reduce overall costs and improve profitability, and long-term incentive plan accrual adjustments in the applicable period. Moving to year-to-date margins on slide 10. Year-to-date GAAP gross margins improved 100 basis points, but non-GAAP adjusted gross margins improved by only 20 basis points in the year-over-year comparisons. Gross margins were affected by the impact of COVID-19 and the UAW labor strike at GM, the negative impact of foreign currency translation, and lower radio remote control sales. These items were partially offset by the benefit of a full year of GRAECON 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 period. Year-to-date GAAP selling administrations as a percentage of sales decreased 290 basis points year-over-year. positively impacted by lower stock-based compensation expense, the fiscal 20 benefit from the fiscal 19 actions and initiatives to reduce costs, lower acquisition costs, and selling and administrative expense attributable to Greycon, 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 exclude acquisition-related costs, operational improvements, and long-term incentive plan accrual adjustments decreased by 50 basis points on a year-to-date basis. Shifting to EBITDA on slide 11. The company generated $54.5 million in the fiscal 24th quarter versus $46.1 million in the same period last year. The EBITDA figure was accomplished in spite of the significant headwinds from the COVID-19 pandemic, which reduced sales by 85 million. Adjusting for expenses for initiatives to reduce overall costs and improve operational profitability, acquisition-related costs, and long-term incentive plan accrual adjustments in the applicable period, fourth quarter fiscal 2019 adjusted EBITDA was 47.2 million as compared to 48.3 million in the current period. Moving to the year-to-date EBITDA on slide 12. The company generated $207.1 million in fiscal 20 versus $155.2 million in the same period last year, in spite of the impact from COVID-19 and the UAW strike at GM. Adjusting for expenses for initiatives to reduce overall costs and improve operational profitability, acquisition-related costs, and long-term incentive plan accrual adjustments in the applicable period, fiscal 19 adjusted EBITDA was $184.9 million as compared to fiscal 20's $203.7 million. The improvement is primarily attributable to higher EBITDA from GRAECON, 12 months of activity versus seven and a half months, and new product launches, partially offset by the adverse impact from COVID-19 and the UAW strike at GM. A few other financial items to review. Year over year, intangible asset amortization expense in fiscal 20 increased 2.9 million, or 18%, to $19 million due to amortization expense related to the Great Penn acquisition, partially offset by lower amortization in the interface segment. In fiscal 20, we invested approximately $45 million in capital expenditures, mainly to support programs and launches in North America and Europe and our facility expansion in India. Year-to-date depreciation expense for fiscal 20 was $29 and more. Our year-to-date tax rate of 17% was higher than the 11.6% in fiscal 2019. This is mainly due to increased income in higher tax rate jurisdictions, an increase of tax reserves, less investment tax credits and lower benefits realized from the finalization of the transition tax from U.S. tax reform. Let's move to slide 13. Free cash flow, as defined as net income plus depreciation and amortization less capex, for fiscal 20 was $126.6 million as compared to $85.1 million in fiscal 19. The cash flow figure represents a record for METHO. As shown on slide 14, we have used some of our cash generation to pay down debt. We have reduced net debt by nearly $75 million since the beginning of the fiscal year, and since the acquisition of Greycon, we've reduced our net debt by nearly $112 million. We ended the fourth quarter with $217.3 million in cash, which includes the $100 million precautionary draw on the credit facility we initiated in March. Our Denta EBITDA ratio, which is used for our bank covenants, is approximately 1.7. This figure includes the impact of the proactive $100 million draw we initiated. Without the draw, the ratio would have been 1.2. Please move to slide 15 to look at our key drivers to our EBITDA performance for Fiscal 20. Looking at the EBITDA based on our $155 million of EBITDA in Fiscal 19 and adding EBITDA from a full year of GRAECON, which is approximately $24 million, Adding EBITDA from our new automotive and laundry program launches of approximately $18 million. Benefits from the costs we incurred in fiscal 19 for initiatives to reduce costs and improve profitability of around $11 million. Adding back the costs we incurred in fiscal 19 related to acquisitions and initiatives to reduce costs and improve profitability of around $29 million. and increasing our international government grant income which includes COVID-19 assistance of six million and subtracting the net impact of COVID-19, the UAW labor strike and other collective net impacts to the business for a total of minus 36 million. Don, that concludes my comments.

Ron, thank you very much. Tom, we are ready to take questions.

Thank you, sir. And ladies and gentlemen, if you'd like to ask a question at this time, it is star one on your touchtone telephone. Please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one on your touchtone telephone at this time if you would like to ask a question. We'll take our first question from Ryan Sigdahl with Craig Hallam.

Great. Thanks, guys, for taking my questions. Good morning, Ryan. First, just First, just want to start. This past year is about as challenging as it can get, it seems, with UAW strike late last year, COVID shutdowns more recently. I know you're not giving specific guidance and understandably so, but directionally, is it reasonable to assume that key financial metrics can improve year over year? Did you say cannot improve? Well, can or can't? I said can. It seems like some of those headwinds will pass here and should be a better year this year. But just curious directionally, any commentary you can make on kind of key financial metrics, revenue, margins, free cash flow, et cetera?

I think by the first quarter being, I don't know, Let's call it somewhat unpredictable and being shut down for really the first half of the quarter. I think we're destined not to have as good a year as we had last year. Now, having said that, once we get to more normalized production and we don't know when that's going to be, then we're going to see the benefits of everything we did in fiscal 20. But at this point, without knowing What the next three, four, five months hold, it's hard to predict that we are going to see an upturn over last year. Now, perhaps on an annualized basis or a run rate basis, we will, but I can't say that at this time.

As we think about maybe a good segue, as we think about the current quarter we're in, so Q1, Maybe any commentary on the COVID impact and what you're seeing kind of the production schedules for Q1 relative to Q4 and how much COVID may be impacted each of those quarters?

Well, COVID hit at the tail end of really six weeks into the fourth, not six weeks, mid-March, started the tail of it. And that was a simultaneous shutdown of customers around the world. So the impact started then and then really continued until just a few weeks ago. As I said in my prepared remarks, none of those facilities closed. We were shipping some products. Some of them were essential. But as I think Ron said, 85 million down in the quarter. Really, as of today, the schedules are still erratic. And around the world, it's just not in the U.S. Customers are releasing product and then putting a hold on it and releasing other product. They're trying to Navigate Consumer Demand. As we look to the future, it's still very much unknown. Now, do we expect it to stabilize at some point? Yes. But the current increase in COVID cases in the U.S. gives me some pause on that, and we really don't know what the fall is going to bring. Ron?

I think based on those levels, with the revenue decreases that we're experienced, depending on how much that carries over in the fiscal, the next fiscal year, you know, it's going to be hard to maintain, you know, margins and things of that nature just due to the negative leverage we're going to have from decreased sales. And to the degree of that, it just happens to be on the degree of the recovery whenever things stabilize.

Now, what we are doing is, as we said, we are taking actions. to streamline our organizations, much like we've done in years past. And one of our base strategies is continuous improvement. So we are taking actions to reduce our cost basis and our S&A, which will benefit us as things start to normalize. But the question is, when do they normalize?

Yeah, no, that's fair and appreciate the color. Switching over to Interface, Can you break down the benefit from the major appliance program launch, which was good to see, versus the higher legacy data solution product? And then secondly, is $19 million-ish revenue that you had in the quarter, is that a good run rate, kind of thinking about the new appliance program launch you had?

The $19 million also included our auto launches, correct? Correct.

It did, yeah. So we're sitting here on the interface. We were at about $60 million for the year last year. So yeah, I think that would be... with the new launches and everything in full launch. The data solutions were up a little bit. They were considered essential business and we were able to continue shipping. So we got some nice, a little bit of an uplift that during the quarter, but it's hard to say the rest of the year what that'll look like into this fiscal year.

But just to add to that, We would expect that the launch of the laundry program for our key customer will continue. Now, again, that could be affected by consumer confidence, but we would expect that they would have, all things being equal, they would have a better year than what they've had because the launch was so delayed.

Good. One last one for me and then I'll turn it over. I'm curious what you can say or what potential, or maybe you have content and words already, but some of the newcomers in EVs, so Nicola, Rivian, et cetera, anything you can comment on those?

I can't comment exactly what the programs are. We have Rivian programs, and that's actually A key focus for us. And then we're, and I'm asking someone to look up what we're doing with the other. Yeah, we're working, okay. Yeah, we are working with both of those. Although I can't tell you to what degree. We got our hands slapped by another customer for doing that. But we are working with them.

And certainly our product fits up very well.

Good. That's it for me. Thanks, guys. Good luck. Thanks, Ryan.

And again, ladies and gentlemen, if you'd like to ask a question at this time, it is star one on your touchtone telephone. Star one to ask a question. We'll go next to Matt Sheeran with Steve Holt.

Hi, it's Matt Sheeran from Stiefel. Thanks for taking my question. Your commentary regarding the sort of erratic order environment from customers, not a surprise, but could you give us some view in terms of whether you think there's some inventory work down that's happening, or is it more just a question of your customers trying to understand what their end demand is, and that's why they're adjusting the order schedules?

I would say the latter, and if anything, what we've seen in the initial restart here is inventory replenishment. I don't know if that normalizes, but our view is that we're navigating an erratic Erratic Demand. I don't want to minimize it, but I don't think it's any more complicated than that. Now, dealer traffic has been good, as I said earlier, so that gives us some optimism that consumer competence still remains strong enough to bolster auto sales.

Well, thank you for that. And if you look, I know that IHS is calling for significant production growth in Q3, calendar Q3, just on production and factories coming back. But how do you correlate to actual production in terms of when you see the orders start to uptick?

Very good question. We have the benefit of customer releases. And normally in auto, your weekly and monthly releases are very reliable. And, you know, perhaps as you go out three to six months, they get a little softer. But we've seen tremendous volatility in even the weekly schedules, which is what causes us... I guess concern, and I agree the IHS is saying Q3. So we also look at that, we'll look at LMC, we'll look at IHS, and the predominant benefit we have is looking at our releases. But right now, we don't see, I don't see the correlation. Will we? Yes, I think. at some point, whether it's Q3 calendar. It's also important that any uptick in demand, we can respond to. We're ready. We have looked at all of our supply lines, all our vendors and inventory. And once that increases, and it will increase, it's not a matter of if, it's when, if the customer wants the product, we definitely can ship it. And we had no customer delays since the crisis started. We had some vendor issues we had to deal with. And I'm talking across the board, not just auto. But we have not delayed the customer, and we certainly weren't going forward. So if the demand is there, we will definitely supply and see the benefit from it.

Okay. And your lead times are at normal levels right now? Could you remind us what they are?

The lead times? Yeah. For the customer? I mean, it's just in time manufacturing.

Yeah. Okay, so you have inventory in the hubs. Okay. All right. Okay, thanks so much for the call. I appreciate it. Cool.

And there appear to be no further questions in the queue. At this time, I'd like to turn the call back over to Mr. Duda for any closing remarks.

Tom, thank you very much. We'll close with wishing everyone a very safe and enjoyable Independence holiday. Thank you for listening today.

And ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may disconnect at this time and have a great day.