Methode Electronics, Inc.

Greetings. Welcome to the METO Electronics Second Quarter Fiscal 2021 results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I'll now turn the conference over to your host, Rob Cherry, Vice President of Investor Relations. You may begin.

Thank you, Operator. Good morning and welcome to Metho Electronics Fiscal 2021 Second Quarter Earnings Conference Call. For this call, we have prepared a presentation entitled Fiscal 2021 Second Quarter Financial Results, which can be viewed on the webcast of this call or found at metho.com on the Investors page. 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 undertakes 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 conference call involve a number of risks and uncertainties. The factors that could cause actual results to differ materially from our expectations are detailed in methods filings with the Securities and Exchange Commission, such as our 10-K and 10-Q reports. At this time, I'd like to turn the call over to Mr. Don Duda, President and Chief Executive Officer.

Thank you, Rob, and good morning, everyone, and thank you for joining us for our fiscal 2021 Second Quarter Earnings Conference call. I'm joined today by Ron Zumis, our Chief Financial Officer. Both Ron and I have opening comments and then we will take your questions. Let's begin on slide four with a brief summary of our financial results for our fiscal second quarter, which ended on October 31st. Method second quarter sales increased 17% to nearly $301 million. Our net income increased 62% and our diluted earnings per share increased 60%. Ron will provide more detail on financial results a bit later. Turning to the business highlights on slide five, the $301 million in net sales as well as our $45 million in income from operations were both records for Meppo. The resulting operating income margin was 15%. These record results are a validation of our strategy and the product of the relentless efforts and commitment of our global team. In the quarter, we saw a significant rebound in automotive demand as compared to the first quarter, which had been impacted by the pandemic and created uncertainty in OEM production schedules. The automotive segment sales for the quarter were also a record at 216 million. It was another strong quarter for our EV businesses as well. Sales for EV applications were over 9% of our total consolidated sales. We also saw continued strength for EV bookings during the quarter, with the annual expected sales from those awards totaling over $28 million. As many of you know, much of Method's historical growth came from our user interface products. With our move into vehicle LED lighting and with our longstanding reputation and capabilities in power distribution in conjunction with user interface, Method is uniquely qualified as a three-pronged solution provider for electric vehicles. We are globally well positioned and anticipate continued growth in this market. Regarding our balance sheet, we continue to generate strong free cash flow and reduced our net debt in the quarter. We have ample liquidity and our net leverage ratio continues to be low. The strength and flexibility of your balance sheet allows us to consider multiple paths to invest in the business in order to drive growth and shareholder return. On COVID-19, I continue to take pride in our employees' incredible commitment to method and supporting our efforts to provide a safe work environment. All of our facilities are currently open, and we are making prudent use of work from home where possible. We do anticipate seeing some level of uncertainty from COVID-19 throughout the remaining fiscal year. However, as I stressed since the beginning of this pandemic, We will continue to invest in our businesses for long-term growth. Moving to slide six, during the second quarter, MEPA booked a number of awards capitalizing on the strategic trends in vehicle electrification, LED lighting, and data centers. The awards identified here represent a cross-section of the business wins in the quarter and represent over 40 million in annual business. In vehicle electrification, We won awards for ambient and functional lighting, overhead council, and bus bar programs totaling over $28 million annually. As I highlighted last quarter, we continue to win programs with OEMs in the US, Europe, and Asia. EV is a global growth driver for Method. In non-EV LED lighting, we were awarded programs for several auto applications. We also continue to participate in the growth of the data centers driven by cloud computing with programs for bus bars and pluggable modules. Lastly, we experienced a bounce in aerospace with the Defense Program Award. Of note, in the first half of the fiscal year, Method booked awards approximately 100 million in annual sales. Looking forward, we are providing sales and EPS guidance for only the fiscal 2021 third quarter due to the market risk and uncertainty from the ongoing pandemic. Turning to slide seven, we recently presented at an investor conference, and I would like to share our key messaging from it. Our strategic focus is on diversification, growth, and financial improvement. Given the progress that we've made diversifying our product portfolio into power, lighting and sensors, We are now actively capitalizing on key market trends like EVs, commercial vehicles, and cloud computing. With our technology solutions portfolio, we are able to address customer needs while increasing content per vehicle, penetrating non-auto markets, and cross-selling into existing customers. This will allow us to drive organic growth, something we were clearly demonstrating in fiscal 2020 until forwarded by the UAW strike at General Motors and COVID-19. At the same time, we expect to continue to augment our technology and product portfolios through acquisitions that build on our strategy. We believe these actions will further improve our product mix and combined with operational efficiencies will help to drive margin expansion. Lastly, through our lean manufacturing capabilities, we're targeting further improvement in working capital. Moving to slide eight, as I mentioned earlier, much of Method's historical growth came from our user interface products. With our move into vehicle interior and exterior LED lighting, and with our longstanding experience and capabilities in power distribution, Method has become uniquely qualified as a three-pronged solution provider for electric vehicles. In addition to our user interface offerings, such as overhead councils, integrated center councils, and switches, For a second prong, we are leveraging the powerful combinations of our auto grade manufacturing operations, our auto pedigree, and our power distribution expertise to supply various bus bars, connectors, and battery disconnect units to the EV OEMs. Our third prong in our approach to the EV market is lighting. We are able to supply our Pacific Insight ambient lighting technology and our Graycon LED technology to provide both interior and exterior lighting solutions. Our energy efficient LED is an ideal fit for EVs and their need to minimize power consumption. Turning to slide nine, with the growing shift from internal combustion engines to electric vehicles, Method has a clear opportunity to grow our content per vehicle. Additional content in an EV could range from 20% to over 100% above our current content on internal combustion vehicle. We expect EV applications to be a high single-digit percentage of our current fiscal year total sales, and we have an order pipeline that should easily drive that to low double-digit percentage in our next fiscal year. EV is a clear tailwind for Method. Next, I'd like to comment on our new five-year long-term incentive plan as described in our September 8K filing which includes time-based and performance-based awards. The performance-based awards may be earned based on fiscal 2025 EBITDA with threshold, target, and maximum performance goals. On slide 10, you can find the EBITDA target performance. As some of you know, the METHO team concluded two such plans, one ending in fiscal year 2015 and the other in fiscal year 2020. The more recent plan resulted in over 7% annual EBITDA growth, and our new plan targets just under 8% annual growth. While we always have to contend with programs going end of life, and we may exit businesses for strategic reasons, we're confident that we have a path via organic growth, operational improvements, and acquisitions to achieve the target of $300 million in EBITDA in fiscal year 2025. To conclude, Given the recent macroeconomic and pandemic situations, I am extremely pleased that our strategy and team were able to deliver record results, generate significant free cash flow, and win additional EV awards in the quarter. At this point, I'll turn the call over to Ron, who will provide more detail on our second quarter financial results.

Ron? Thank you, Don, and good morning, everyone. Please turn to slide 12. Second quarter sales increased 17% or $43.6 million to $300.8 million in fiscal 21 from $257.2 million in fiscal 20. Sales in the second quarter were positively impacted by the increased demand in all of our reporting segments as we recover from the lower first quarter production levels due to the COVID-19 pandemic. The year-over-year quarterly comparisons benefited from the $32 million impact of the UAW strike on General Motors in the second quarter of fiscal 20. In addition, the favorable impact of foreign currency on sales was $6.5 million in the current quarter. The company generated year-over-year organic growth. Second quarter net income increased 14.8 million to 38.6 million or $1.01 per diluted share from 23.8 million or 63 cents per diluted share in the same period last year. In addition to the flow through from higher sales and leveraging of SG&A expenses, second quarter net income also benefited from other income from foreign governmental COVID-19 assistance of 3.3 million partially offset by $4.2 million of restructuring costs. Please turn to slide 13. Second quarter gross margins were slightly higher in fiscal 21 as compared to fiscal 20, mainly due to higher sales volumes. Fiscal 21 second quarter margins were 26.9% as compared to 26.7% in the second quarter of fiscal 20. From a sales growth perspective, segment growth mix was unfavorable as a 4% increase in sales in the highest margin industrial segment was partially muted by the 19.8% and 37.8% increases in the automotive and interface segments, respectively. These segments have a lower growth margin profile as compared to the industrial segment. The fiscal 21 second quarter gross margins included $2.7 million of restructuring expense, and the second quarter of fiscal 20 gross margins included $200,000 of restructuring costs. Second quarter selling and administrative expenses as a percentage of sales decreased 270 basis points year over year, or 10.2%, compared to 12.9% in the fiscal 22nd quarter. The fiscal 21 second quarter figure was attributable to leverage gain from increased sales, lower stock-based compensation expense, lower wages and associated benefits due to the COVID-related salary reduction and shorter work weeks, and much lower travel expense, partially offset by restructuring expense of $1.5 million. There was $300,000 of restructuring expense in the second quarter of fiscal 20. Regarding our restructuring activities, the company continues to monitor market factors and trends and will continue to evaluate possible additional actions to reduce overall costs and improve future operational profitability, especially in the current COVID-19 environment, which has seen an alarming increase in cases globally. The company currently expects an additional restructuring expense of 700,000 in fiscal 21 resulting from the second quarter actions. The company may take additional actions in the future based on conditions as required. Please turn to slide 14. Net income was $38.6 million in the second quarter of fiscal 21 as opposed to $23.8 million in the second quarter of fiscal 20. The main drivers between the fiscal periods were higher sales, received a $3.3 million of foreign government assistance due to COVID, lower selling of administrative expenses, partially offset by higher restructuring costs. Shifting to EBITDA, a non-GAAP financial measure, fiscal 21 second quarter EBITDA was $60.2 million versus $43.6 million in the same period last year. EBITDA was positively impacted by increased sales foreign governmental COVID assistance, and the benefit from restructuring actions taken in prior fiscal years. A few other financial items to review. In the second quarter of fiscal 21, we invested approximately 3.6 million in CapEx as compared to 13.6 million in the second quarter of fiscal 20. The fiscal 21 year-to-date second quarter investment represents an approximately Thank you for joining us today. Thank you for joining us. This relatively minor difference in effective tax rate was due to jurisdictional earnings and not discrete income tax activity. Please turn to slide 15. We deleveraged gross debt by $2.2 million in the second quarter. Since our acquisition of Greycon in September of 2018, when adjusting for the $100 million precautionary credit facility draw in March of 2020, We have reduced gross debt by $110 million. Net debt decreased by $29.5 million in the second quarter of fiscal 21 as compared to the fiscal 20 year end, from $134.8 million to $105.3 million. We ended the second quarter with $242.3 million in cash, which includes the $100 million precautionary draw on the credit facility in March. In November, We've repaid $50 million of the March precautionary draw and will continue to evaluate the landscape in the third quarter and may pay down the precautionary draw even further. Our debt to trailing 12 months EBITDA ratio, which is used for our bank covenants, is approximately 1.7. This figure includes the impact of the precautionary $100 million draw we initiated in March. Without the draw, the ratio would have been approximately 1.2. Our net debt to trailing 12 months EBITDA ratio was a strong 0.5. Please turn to slide 16. Free cash flow, a non-GAAP financial measure, which effective in fiscal 21 is defined as cash provided from operating activities minus capex. Prior to fiscal 21, it was defined as net income plus depreciation and amortization, less capex. For the fiscal 21 second quarter, free cash flow was $36.7 million as compared to $35.1 million in the second quarter of fiscal 20. As Don mentioned in his remarks, we are providing revenue and earnings per share guidance for the third quarter, which is subject to disruption at any time due to a variety of factors, including the ongoing COVID-19 pandemic situation. Please note that the third quarter of fiscal 21 contains 13 work weeks, whereas the third quarter of fiscal 20 had 14 work weeks. The revenue range for the third quarter is between $265 and $285 million. Diluted earnings per share range is between $0.69 and $0.85 per share. Don, that concludes my comments.

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

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment as we poll for questions. And our first question is from Luke Junt with Baird. Please proceed with your questions.

Good morning, everyone. Good morning, Luke. Don, I was hoping we could start with overall award activity around EVs. You know, just in recent weeks here, we've seen a number of traditional auto OEMs either go kind of quasi all-in on EVs or at least noticeably increase or accelerate those investments. Here's what you're seeing in terms of conversations around new business awards right now. I realize things are evolving very quickly, but we'd be curious to get your perspective on what's going on right now.

We're seeing the same. Easily we're seeing the most RFQs that we've seen probably ever for EVs. And if you look at the bookings, better than half the bookings were EV related. So we're seeing the same thing. And you're right, you're seeing traditional customers that are either amping up or going all in on EVs. And as I said in my first remark, we've got three very strong products that we can sell to these customers.

And then following up on that, you noted, I think it was in the press release, Cthulhu Strength in Asia as it relates to EVs. Just wondering if you could expand on that perhaps. Yeah.

That's an example of our cross-selling in the different regions. We added to our sales force there, and then we did that a while ago, and now we're starting to see the effect of that, although I should point out that a portion of our sales increase in Asia was the transfer of some EV product that had been being produced in North America, and that was transferred to Asia at the customer's request, and that was planned. But, Nat, we still improved in Asia considerably.

Okay. And then, Ron, maybe a question for you. And you mentioned on the guidance slide that we do have this modeling issue related to the extra week in last year's third quarter that doesn't repeat this year. Can you maybe put a finer point on what guidance assumes for that as it relates to, I guess, mainly top line and any expense implications that we should be watching for?

Yeah, so with that, I mean, let me start by answering it. It's a little bit challenging in the third quarter anyway because of holiday shutdowns and things of that nature. There's typically less workdays in there anyway. But so what we're modeling would be the, you know, in terms of the sales, you know, about, you know, maybe somewhere between, you know, 7% to 10% of, you know, the last year's quarter sales would not be repeated because otherwise the run rates are somewhat similar.

Okay. Any, yeah, I assume we should sort of think of expenses in a similar framework.

Yeah, we'll get a little bit less, you know, because we're, yeah, the expense lines and all that would be, you know, would be consistent quarter over quarter sequentially in that. So it's just typically modeling the less, the less, the one week less revenue and the, and the accounting for some type of holiday shutdowns and that nature as well.

Okay. That's good. Well, I'll leave it there and pass it on. Thank you.

Our next question is from Ryan Sigdahl with Craig Allen. Please proceed with your question.

Great. Thanks for taking our questions. And good morning, Don, Ron. You mentioned it a little bit, but I want to dig a little bit into guidance. You mentioned some holiday shutdowns, but OEMs are ramping production and kind of looking at industry forecasts. I guess midpoint of your guidance is for 9% revenue decline sequentially. Is there anything else to call up besides just holidays? Was there anything pulled forward into this quarter? Anything particularly noteworthy for the next quarter?

No, nothing was pulled forward into the quarter. and we'll have to see what the automakers do on their releases and what kind of shutdowns they have. We know they'll shut down for a period of time, but it does vary from year to year, so we'll have to wait and see a bit more on that. But other than the reduced week from last year, And it's an unknown on what the pandemic is going to do. And obviously, if an automaker shuts down, then that's going to impact us, to state the obvious. But I don't think there's anything else.

No, there is nothing significant that we got credit for in 2Q that we aren't going to get credit for in Q3 because of that. So pretty much standard runway execution.

Yeah, I guess more pointedly, I mean, IHS is forecasting global auto production up quarter over quarter, calendar Q3, Q4. You guys are down 9%. Doesn't sound like anything else. So I guess, can you help me? Are you guys taking a more conservative approach relative to kind of industry forecasters?

Well, I mean, we look at the industry reports, but then we overlay that with the releases we have, what programs we're on, and that's what gives us our guidance range. And we don't necessarily, because of our concentration in trucks and SUVs, we don't necessarily track to the SAR and that's why we go into excruciating detail when we put together the guidance. We're literally going part number by part number when we put it together because you can't look at methods and say, okay, the SAR is up X percent, so therefore we will be, in any given quarter, we can be up or down compared to the SAR. It's just really the mix. And I don't want to say that we were conservative in the quarter, but I think we used our normal methodology to determine the product mix and the guidance.

Good. Just moving over to aerospace, this is the first award that I can remember in some time. Can you comment, I guess, on traction you're getting there and then opportunity if there's more behind that or if this is kind of a one-off award?

It's always very hard to predict. It was a sizable award, noteworthy. So I don't know that that makes a trend. But we have seen an increase in RFQs. Whether those materialize in this fiscal year or not, that's always hard to predict. It's a very dynamic business from that standpoint. So I don't know that I would read too much into that other than I can tell you that our and a number of RFQs that we're responding to are up.

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

Thank you. And again, as a reminder, if you have a question, you may press star 1 on your telephone keypad. Our next question is from Matt Shearing with Stifle. Please proceed with your question.

Yes. Good morning and thanks for taking the question. Just following up on the last question regarding your outlook and specifically demand for automotive, I know over the last couple of quarters in the June quarter you saw or July quarter a lot of volatility quarter to quarter in terms of customer orders and then of course the big surge last quarter. Are you starting to get a little bit more visibility in terms of weekly releases and order?

For the quarter, and I hesitate to say this, but things have stabilized. Keep in mind that that could change here. But there's enough volatility really around the world, maybe More in North America and Europe, that makes it difficult for us to go past the third quarter. That still, schedules are changing dramatically from release to release, so it would be difficult to forecast that. But for the quarter, I believe the, well, when we track The take rate from the release rate, that has normalized for us, which gives us confidence in the quarter, again, barring some OEM shutting down because of COVID.

Yep. And are you getting a sense following this big increase in orders and sales that the auto supply chain is largely kind of normalized after being and many more. So, I think it's going to be difficult to say what percentage is the sell through versus inventory replacement, but we do know that there still is a

Inventory is still down on some of our key customers. On the other hand, as reported, sales have been very good as well.

But there is still a mixed bag of that.

And I would anticipate that's going to go into next year for sure. And I would also point to, we're supplying everything our customers need. So we're not missing any shipments. But we do know that the bills are being somewhat moderated by other shortages.

Again, not method. I got it. I got it. Other supply chain constraints. I got it. Okay. Okay. Thanks very much.

Well, thank you. And we have reached the end of the question and answer session, and I'll now turn the call over to Don Duda for closing remarks.

Thank you. We'll thank everyone for listening and for their questions and wish everybody a very enjoyable and safe holiday season. Good day.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.