Methode Electronics, Inc.

Good morning, ladies and gentlemen, and welcome to the Method Electronics fourth quarter fiscal 2021 results. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Rob Cherry, Vice President of Investor Relations. Sir, the floor is yours.

Thank you, Operator. Good morning, and welcome to Method Electronics fiscal 2021 fourth quarter earnings conference call. For this call, we have prepared a presentation entitled Fiscal 2021 Fourth 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 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 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 Method's filings with the Securities and Exchange Commission, such as our 10 and 10 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. Thank you for joining us for a fiscal 2021 fourth quarter earnings conference call. I'm joined today by Ron Zumis, our Chief Financial Officer. Both Ron and I will have opening comments, and then we will take your questions. Let's begin with the business highlights on slide four. Our sales for the quarter were $301 million. Excluding favorable currency translation, our organic growth was up 37% from the prior year. It should be noted, however, that our prior year quarter was significantly impacted by the pandemic. In this year's fourth quarter, our team faced multiple challenges, first with the chip shortages and then with the plastic resin shortages resulting from the freeze in Texas. These issues, along with the ongoing port congestion, created meaningful headwinds. In response, the method team did what it does best, recognize a challenge early, work with the customers and suppliers to develop solutions, and then execute. As a result, we were able to meet the high end of our sales guidance for the quarter. However, the supply chain disruptions required remedial actions such as expedited shipping and premium component pricing that significantly impacted our margins. Moving forward, these challenges are lingering into the first quarter, and some may continue until the end of this calendar year. However, we have confidence in the situation improving as evidenced by our guidance for the full fiscal year. The growth that we realized in the fourth quarter was due to increased demand across most of our businesses, but was especially focused in auto and commercial vehicles. We also saw growth in our DeBeer business as a result of a major hospital system order. Overall, we had strong awards for EV, LED, lighting, and e-bikes. Focusing on EV. Last quarter, we reported that sales into EV applications were over 12% of consolidated sales. This quarter, EV sales were over 13% of consolidated sales, and we continue to expect the number to be in the mid-teens for fiscal 2022. Method's combination of user interface, LED lighting, and power distribution solutions is a winning formula in EV, but we are especially seeing growth in our power offering. This is where Method leverages over 40 years of auto-grade manufacturing operations and power distribution expertise to supply bus bars, connectors, and battery disconnect units to the EV OEMs. Regarding our balance sheet, we generated $31 million in free cash flow and further reduced our net debt in the quarter. We continue to have ample liquidity, and our net leverage ratio is now near zero. The strength and flexibility of our balance sheet allows us to consider multiple paths to invest in the business in order to drive growth and ultimately shareholder returns. As an example, this quarter we initiated a stock buyback program and purchased $7.5 million in Methode shares. After the quarter end, we also announced a 27% increase to our dividend. Methode's business model continues to generate excellent free cash, and we are allocating capital per our balanced approach. Moving to slide five. Methyl finished the fiscal year with another strong quarter of business awards. These awards continue to capitalize on key market trends like vehicle electrification, LED lighting and auto, and cloud computing. The awards identified here represent a cross-section of the business wins in the quarter and represent over $40 million in annual business at full production. In vehicle electrification, we won awards for power distribution, user interface and LED lighting programs. We continue doing programs with OEMs globally in both auto and commercial vehicle applications. In non-EV LED lighting, we rewarded programs for automotive and motorcycle applications. In cloud computing, we continue to see demand for our power distribution products and data center applications. Additionally, we continue to participate in the growth of e-bikes which utilizes our proprietary magneto-elastic technology. We also won two awards for traditional user interface solutions, as well as secured a power distribution award for a wind farm application. Turning to slide six, as noted in our release this morning, the company's accounting period for fiscal 2021 included 52 weeks as compared to 53 weeks for fiscal 2020. Despite having one less week, We were able to deliver year-over-year organic growth and finished with record sales of $1,088,000,000 for the year. Also a record for the year was our free cash flow of $155,000,000. The team's disciplined focus on working capital improvements throughout the year made this result possible. The strong fourth quarter drove our EV sales for the full year to over 12% of total consolidated sales. All of our key solutions, user interface, LED lighting, and power distribution contributed to our EV growth. Lastly, for the full year, Method's business awards were over $200 million in estimated annual sales at full production, with the majority being in our target markets of EV, commercial vehicle, e-bike, and cloud computing. As I mentioned last quarter, our business awards over the last couple of years have put us on track in aggregate to replace the sales from the roll-off of our largest auto program. As such, our customer and program concentrations continue to improve, and our foundation for organic growth is building. On a side note, moving to slide seven, you will see that we recently celebrated our 75th anniversary. Method Electronics was founded in 1946 by William J. McGinley in Chicago. The company started with the production of tube sockets used in radios and early television sets. It was named from an anagram of a good manufacturing method and the electrode and cathode of a vacuum tube forming the word method. Today, Method has grown into a world-class manufacturer and continues to develop new technology and innovative solutions for our customers worldwide. The entire Method team is proud to carry on the legacy of Mr. McGinley. To conclude, given the reasons to apply, Chain challenges, I am extremely pleased that our team was able to deliver at the high end of our guidance, generate solid free cash flow, and win substantial program awards in the quarter. As I articulated earlier, the supplies chain issues are still present and they're impacting our first quarter. However, we believe they will diminish over the course of our fiscal year, which would put us in a position to deliver strong, organic growth for fiscal 2022. At this point, I'll turn the call over to Ron, who will provide more detail on our fourth quarter and full year financial results. Thank you, Donnie. Good morning, everyone. Please turn to slide nine. Fourth quarter sales were $301 million in fiscal year 21 compared to $210.6 million in fiscal year 20, an increase of $90.4 million, or 42.9%. The year-over-year quarterly comparisons included a favorable corn foreign currency impact on sales of 11.5 million in the quarter. The increase was mainly due to lower sales in the prior year quarter from the impact of the COVID-19 pandemic and to higher sales of electric and hybrid vehicle products. Fourth quarter net income increased a million to 31.1 million or 81 cents per diluted share from 30.1 million or 79 cents per diluted share in the same period last year. Net income benefited from lower income tax expense and favorable foreign currency translation offset by higher costs from supply chain shortages, higher sales and administrative expenses, and lower other income. Please turn to slide 10. Fourth quarter gross margins were lower in the fiscal year 21 as compared to fiscal year 20, mainly due to higher material costs, higher logistics costs, including freight and supply chain shortages. Fiscal year 21 fourth quarter margins were 25.1 percent as compared to 28.1 percent in the fourth quarter of fiscal year 20. The supply disruption accounted for over 200 basis points of the margin decrease. The higher logistics costs, including freight and supply chain shortages that were experienced in the fourth quarter are expected to continue into fiscal 22. In addition, we anticipate a degree of cost inflation continuing into fiscal year 22. Fourth quarter selling and administrative expenses as a percentage of sales increased to 12.3% as compared to 8.6% in the fiscal year 24th quarter. The fiscal year 21 fourth quarter percentage increase was attributable to higher stock-based and performance-based compensation expenses, mainly as a result of compensation accrual reversals in the prior year quarter related to the negative impact of the COVID-19 pandemic on the fiscal 2020 financial performance measures. The fourth quarter fiscal 21 SG&A percentage is more in line with the historical norm, which would still yield an efficient flow through from gross margin to operating income. Please turn to slide 11. In addition to the gross margins and SG&A items mentioned above, two other non-operational items significantly impacted net income in the fourth quarter of fiscal year 21 as compared to the comparable quarter last fiscal year. First, Other income net was lowered by 2.1 million mainly due to lower international government assistance between the comparable quarters. Second, income tax expense in the fourth quarter of fiscal year 21 was 5.5 million or 15% as compared to a tax expense of 10 million or 24.9% in the fourth quarter of fiscal year 20. The effective tax rate was higher in the fourth quarter of fiscal year 20 due to an increase and tax reserves in the quarter. Shifting to EBITDA, a non-GAAP financial measure, fiscal 21 fourth quarter EBITDA was $50.8 million versus $54.5 million in the same period last year. EBITDA was negatively impacted by lower operating income and lower other income. Please turn to slide 12. Net sales increased by 64.1 million to 1.088 billion, of which 26.7 million was attributable to foreign exchange. The 1.088 billion in sales was a record for Metho. Net income was virtually flat as supply chain disruptions, higher performance-based compensation, and increased restructuring contributed to lower pre-tax income which was partially offset by the lower income tax rate. Please turn to slide 13. In fiscal year 21, we reduced gross debt by $112 million, resulting from the full repayment of the $100 million precautionary draw we initiated in March 2020. Since our acquisition of Greycon in September of 2018, we have reduced gross debt by $118 million. Net debt, a non-debt financial measure, decreased by $127.9 million to $6.9 million in the fiscal year 21, from $134.8 million at the end of fiscal year 20. We ended the fourth quarter with $233.2 million in cash. Our debt-to-trailing 12-month EBITDA ratio, which is used for our bank covenants, is approximately 1.25, our net debt to trailing 12 months EBITDA ratio was 0.04, virtually nil. Please turn to slide 14. Free cash flow, a non-GAAP financial measure, which effective in fiscal year 21, is defined as net cash provided from operating activities, less capex. For fiscal year 21, fourth quarter, free cash flow was $31.2 million, as compared to $47.8 million in the fourth quarter of fiscal 20. The decrease was mainly due to higher working capital in the corridor to support year-over-year increased sales. For the full fiscal year 21, we produced record net cash provided by operating activities of nearly $180 million and record pre-cash flow of $155 million. While we don't expect to equal the fiscal year 21 free cash flow results in fiscal 22, largely due to increased working capital to support fiscal year 22 sales growth and increased CapEx, we do expect to generate sizable free cash flow. We anticipate continuing our proven history of consistently generating reliable cash flows, which allow for ample funding of future organic growth, inorganic growth, and return of capital to the shareholders. In the fourth quarter of fiscal year 21, we invested approximately $4.8 million in CapEx as compared to $10.2 million in the fourth quarter of fiscal year 20. The lower fourth quarter CapEx was simply due to timing as opposed to a conscious effort to curtail CapEx. We approved CapEx during the quarter and the full fiscal year that is not yet reflected in the cash flow statement as the actual cash outlay for these approved expenditures will occur in future reporting periods. We have a strong balance sheet and will continue utilizing it by continuing investment in our businesses to grow them organically in the future. In addition, we continue to pursue opportunities for inorganic growth. Regarding capital allocation, we recently announced two initiatives. On March 31st, we announced a 100 million share repurchase program, which we executed 7.5 million of repurchases during the fourth quarter of fiscal year 21. In addition, last week we announced a 27% increase in our quarterly dividend from 11 cents per share to 14 cents per share. We are confident in our cash-generating ability to simultaneously invest in organic growth, inorganic growth, and provide an ample return of capital to the shareholders. Please turn to slide 15. As Don mentioned in his remarks, we are providing revenue and earnings per share guidance in the first quarter of fiscal 22 due to the uncertain direct and indirect impacts from the ongoing semiconductor supply shortage and the continued challenges from other supply disruptions, including poor congestion. The revenue range for the first quarter of fiscal year 22 is between $285 million and $300 million. Diluted earnings per share range is between 68 cents per share to 80 cents per share. The revenue range for the full fiscal year 22 is between $1.175 billion and $1.235 billion. Diluted earnings per share range is between $3.35 per share to $3.75 per share. The midpoint of the range represents an 11 percent increase over fiscal 21, despite having a significantly higher tax rate in fiscal year 22. The wider range is due to the uncertainty from the supply chain disruption for semiconductors and other materials on both Methode and its customers. Factors that could result in us moving towards the higher end of the sales range include higher sales due to lesser disruption of supply to us and or our customers, which would result in higher demand for our products. Lesser disruption would also minimize the cost of sales impact from premium freight, factory inefficiencies, and to a lesser extent, tariffs and other logistic factors such as poor congestion. Don, that concludes my comments. Ron, thank you very much. Catherine, we are ready to take questions.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone now. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold a moment while we poll for questions. Your first question is coming from Luke Junk. Sir, your line is live.

Great, thank you. Good morning, everyone. Good morning, Luke. So I wanted to start with a question on electrification. So electrification lead sales came in at over 12% of sales this year. That's versus what you'd indicated if we look in the first half of the fiscal year of an exaltation that that would be in the high single digits. So a relative basis, about a third higher than you're expecting. What I'm wondering is, as we unpack that, are we seeing benefits from the market in that upside? Or should we read this higher electrification mix as method specific? And if so, if you could help us understand what's driving that fundamentally.

Sure. It's really both. The market is helping us, particularly in Europe, and our new launches, which came from our business wins a year and a half, two years ago. So it's really both. And percentage-wise, I don't know that we could give that now, but We have that let's you want to comment around. Yeah. No, I agree with that Don and you know that of the 12% You know it the split now between automotive and industrial it's more weighted towards industrial which means we're getting more activity from the power side of the vehicle electrification which seems to be strengthening so And the power side Probably is more weighted towards market growth because it's in the batteries and the more batteries, the more cars the OEM sell, the more batteries and the more bus buyers will sell. So I would say that's weighted more towards the market effect.

Okay, thank you for that. Next, a cost-related question in terms of the higher material and logistics costs that you're seeing right now. And what I'm wondering is if we look in the near term, what your level of visibility is into that. You mentioned that you're expecting a continued impact as we move into the first fiscal quarter, but as we look over the next few quarters, let's say, is there any visibility into those costs when starting to abate as we move through the fiscal year as you've built into the guidance effectively?

That is a tough one to answer. One of the reasons we gave quarterly guidance is just the uncertainty in the quarter on shortages and the effect. And just as a reminder, even if we could supply, if our customer does not have a complete bill of materials to build a vehicle, they're not going to release us. So it is very hard to forecast. And again, that's one of the reasons we gave quarterly guidance. most of the reports we've seen you read the same ones we do until the end of calendar year 21 there is a concern that maybe that goes on a little bit longer but then we can say that the resin shortages have for the most part abated themselves not completely but that's moving in the right direction the the CHIP really we're managing on a day-to-day basis. I wish I could give you more information on that, but you probably have as much as we do. Now, do we get a better allocation of CHIPs because of our customers wanting to ship their premium vehicles, trucks, and SUVs? Yes, that does help us being in the center councils in those areas, but it is still relatively unpredictable. Yeah, look, Don said it is spot on. And certainly the first quarter, we had 200 BIPs in the fourth quarter. We would expect maybe not to that level, but some visibility into this quarter will be a little tough from that perspective. But beyond the first quarter this year, it still remains to be seen.

Okay. Thank you for that. And yeah, I appreciate the difficulty in looking into the future there. So I appreciate the color you're able to provide. And then lastly, I just wanted to touch on capital allocation. So in your prepared remarks, covered two spokes of this in terms of the recent announcement with the dividend, as well as share repurchase. Just wanted to get your commentary on your interest level in M&A right now. And from a both from a capital allocation standpoint and strategically, whether or not your focus areas have shifted at all, especially as we're seeing this lift in electrification?

I don't know that our focus has shifted. It's been an industrial mainly, and maybe to a lesser degree medical, but mainly it's industrial along the lines of EV. That would be... a nice combination of an industrial business with some EV content. Again, I won't rule out automotive. I've said that before. We will be optimistic there. But our focus is on industrial. We have a very high focus internally and externally on acquisitions. We've reviewed a number of books that have come in recently. through the quarter, nothing that we thought was actionable, but we continue to look at them. Of course, we also have our own ability to look at companies that might not be for sale, and that's a big emphasis for us. So it's very key to our growth plans, our strategic plans, our long-term growth plans. So we continue, and we have one of the reasons, and the team did a very good job of paying down debt. We want to have liquidity to look at acquisitions as we move forward. Luke, we haven't done an acquisition since September of 2018. That should not be construed that we haven't looked or we're not engaged or we're not active in the process. Method is... very smart, we're disciplined, and we vet things in a very strategic and disciplined manner. So the inactivity has nothing to do with our interest or our level of wanting to grow inorganically.

That all makes sense. I'll leave it there. Thanks for all the comments this morning.

Thank you, Luke.

Once again, ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone now. We have no further questions from the lines at this time. I'd like to turn the floor back to Don for closing remarks.

Catherine, thank you very much, and we'll thank everyone for listening today and wish everyone a very safe and enjoyable summer.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

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