Methode Electronics, Inc.

Greetings and welcome to the Method Electronics fourth quarter and full year fiscal 2023 results call. At this time, all participants are in listen-only mode and 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. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Robert Cherry, Vice President of Investor Relations. Sir, you may begin.

Thank you, Operator. Good morning, and welcome to MetaElectronics Fiscal 2023 Fourth Quarter and Full Year Earnings Conference Call. For this call, we have prepared a presentation entitled Fiscal 2023 Fourth Quarter and Full Year 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.

Don Duda Thank you, Ron, and good morning, everyone. Thank you for joining us for our fiscal 2023 fourth quarter earnings conference call. I'm joined today by Ron Zumwitz, our Chief Financial Officer, and both Ron and I will have opening comments, and then we will take your questions. Let's begin with the highlights on slide four. Our sales for the quarter were a healthy $301 million. They were up 4% compared to the prior year, but up 9%, excluding a significant headwind from foreign exchange and a drop in material spot buy and premium freight cost recovery. The increase was mainly due to higher sales in the industrial segment driven by lighting solutions for commercial vehicles and by power distribution solutions for electric vehicles. The sales growth from lighting and power products is another data point in our strategic pivot to reduce our reliance on user interface solutions. In the quarter, we continue to face ongoing cost increases due to inflation in material and labor, which continue to be a drag on margins. The ongoing cycle of inflation and subsequent efforts to obtain price increases from customers is a persistent challenge. I cannot stress that enough. We can, however, report a significant reduction in spot buys and expedited shipping as supply chain constraints have improved over last year. On the order front, we have a very strong quarter with over $250 million in annual program awards. These programs were once again dominated by electric vehicle programs. The Nordic Lights acquisition, which is an exciting opportunity to grow our lighting franchise and gain more industrial and non-auto market exposure, is nearing completion. While we have secured over 99% of the outstanding shares, we're still working through the squeeze-out process for the remaining shares. Once that legal process is complete, we will be able to provide more information. Turning back to EV activity, Sales in the quarter were 23% of our consolidated total and were a record on a dollar basis. In regards to awards, we won over $215 million in annual EV awards in the quarter. Looking forward on EV, activity will be strong again in fiscal 2024, but will be very dependent on auto OEM take rates as well as the timing of program roll-offs. In the quarter, we had an increase in debt. which was driven entirely by the Nordic Lights acquisition. During the quarter, we purchased approximately $8 million of shares. Of the announced $200 million board authorization, we have now purchased $119 million in total. Prior to the Nordic Lights acquisition, this buyback program was a key focus of our capital allocation strategy. With the increased debt level, part of our focus will return to debt reduction. Lastly, but just as important than anything on the slide, we generated $38 million in free cash flow in the quarter, which is an indication of our attention to operational performance and a focus on generating cash in our business model. Moving to slide five. The awards identified here represent some of the key wins in the quarter and represent $258 million in annual sales at full production. As a reminder, the launch timing of most of these programs could be anywhere in the range of one to three years from now. The awards were mainly for power products associated with the EV skateboard architecture. The awards were also heavily weighted towards the United States, where EV coding activity has clearly picked up. In other areas, we're awarded programs for lighting, user interface, and sensor solutions for applications in commercial vehicles and e-bike. I would like to take a step back and reflect on our EV activity over the last three years. Since the beginning of fiscal year 2021, we have won approximately $600 million in EV awards. This award stream acts like a backlog of potential future business. There is little doubt that EVs will be driving our organic growth in the coming years. Turning to slide six in our fiscal 2023 highlights, we delivered sales growth for the sixth year in a row and finished with a record sale of $1,180,000,000 for the full year. Excluding foreign exchange and cost recovery, we had a 7% year-over-year sales growth. Material, labor, and overall manufacturing cost inflation challenges during the year took a toll on earnings. Clearly, we were disappointed in the cost recovery efforts with our customers. Those efforts continue, as well as other initiatives to improve manufacturing efficiencies. However, program awards were very strong, reaching over $435 million with over 75% in EV applications. The strength of our bookings gives me confidence that along with the aforementioned initiatives, we'll achieve the margin expansion that supports our guidance for fiscal 2025. We had record sales into EV applications, and they reached 21% of our total sales for the full year. Our free cash Flow generation was up 50 percent year-over-year and supported the purchase of $48 million of shares, as well as our ongoing dividend program. It was a challenging quarter and a year plagued by ongoing cost inflation headwinds. However, our worldwide team still delivered organic sales growth for the year. Moving to slide seven, looking forward, we're expecting a slight slowdown in sales for fiscal 2024, and then a significant ramp up of sales in fiscal 2025. I want to walk you through the basic drivers of this. As you can see from the slide, the net of program roll-offs and program launches is a sales headwind in fiscal 2024. While Nordic Lights will add to our sales, we expect headwinds in the commercial vehicle, data center, and e-bike markets. The net result of all this is a slight sales slowdown in fiscal 2024. In fiscal 2025, the net of program roll-offs and program launches becomes a tailwind. We also expect a tailwind from strengthening commercial vehicles, data centers, and e-bike markets. The net result is an 11 percent organic sales growth rate from fiscal 2024 to fiscal 2025. With the strong award pipeline from the past three years and the effort Method has made to transition its product portfolio further into lighting and power solutions, This fiscal 2025 guidance demonstrates that our business model is healthy and is positioned to prosper from the strategic steps that we've taken to grow the business. Turning to slide eight. In summary, Meadowhead had a number of successes in fiscal 2023. We achieved record sales in our industrial segment with growth of 29 percent. We delivered record sales in the EV applications We generated strong free cash flow. And lastly, we executed the acquisition of Nordic Lights. Turning to our look, due to the program roll-offs and the expected weakness in key markets, we expect to have lower organic sales in fiscal 2024. In addition, we will be making significant investments and launching over 20 new programs. These investments include significant tooling and increased staffing. This activity, along with multiple years of strong awards, will enable us not only to replace the sunsetting programs, but to organically grow the business 11% from fiscal 2024 to fiscal 2025. At this point, I'll turn the call over to Ron, who will provide more details on our fourth quarter and full year financial results, as well as more details on our outlook. Ron. Thank you, Don. And good morning, everyone. Please turn to slide 10. Fourth quarter net sales were $301.2 million compared to $287.7 million in fiscal 22, an increase of 4.3 percent. This quarter sales had $7.7 million unfavorable currency impact and $2.5 million favorable spot buy and premium freight cost recovery impact. Also impacting the quarter's prior year comparison was the roll-off of a large automotive program in North America. Excluding the foreign currency in year-over-year cost recovery impacts, sales increased by 8.8%. The strength in the quarter was driven by lighting solutions in commercial vehicles and power solutions in EV. EV product applications were 23% of sales in the quarter. Fourth quarter income from operations decreased 41.8% to $8.5 million from $14.6 million in fiscal 22, mainly due to acquisition costs, material cost inflation, and unfavorable foreign currency translation. Partially offsetting those factors was the higher sales volume. Adjusting for acquisition costs of $6.8 million and costs related to the reorganization of a foreign subsidiary of $0.5 million, our non-GAAP adjusted income from operations increased 8.2% to $15.8 million from $14.6 million in fiscal 22. Please turn to slide 11. Fourth quarter diluted earnings per share decreased 48.8 percent to 22 cents per share per diluted share from 43 cents per diluted share in the same period last fiscal year. The EPS was negatively impacted from the acquisition costs, material cost inflation, and unfavorable foreign currency translation. Adjusting for the net acquisition cost of 6.6 million and the net benefit related to the reorganization of a foreign subsidy area of 7 million, our non-GAAP adjusted diluted EPS decreased 51.2% to 21 cents per diluted share from 43 cents in fiscal 22. Shifting to EBITDA, a non-GAAP financial measure, fourth quarter EBITDA was 21.9 million versus 30.8 million in the same period last fiscal year, a 28.9% decrease. EBITDA was negatively impacted by acquisition costs, material cost inflation, and the unfavorable foreign currency translation. Higher sales volumes helped to partially offset the decrease. Adjusting for acquisition costs of $6.8 million and costs of $2.6 million related to the reorganization of a foreign subsidiary, our adjusted EBITDA increased 1.6% to $31.3 million from $30.8 million in fiscal 22. Please turn to slide 12. We increased gross debt by 96.3 million for the full year, mainly due to the Nordic Lights acquisition. We ended the year with 157 million in cash, down 15 million for the full year. During the quarter, we bought back shares for 8.5 million, bringing the year-to-date total to 48.1 million. Net debt, a non-GAAP financial measure, increased by $111.3 million to $149.8 million in the full year from $38.5 million at the end of fiscal 22. Again, the main driver of the increase was the Nordic Lights acquisition. Our debt-to-trailing 12-month EBITDA ratio was approximately 2.2. Our net debt-to-trailing 12-month EBITDA ratio was approximately 1. We continue to have solid debt capacity, which offers the company flexibility from a capital allocation perspective, especially for inter-granted growth initiatives. Please turn to slide 13. Fourth quarter net cash from operating activities was a healthy $49 million as compared to $42 million in fiscal 22. The increase of $7 million was primarily due to working capital improvements in the quarter. Fourth quarter capital expenditure was $11.2 million as compared to $8.4 million in fiscal 22, an increase of $2.8 million. The increase was mainly a function of a lower level of spending in the prior year quarter as the spending level this quarter was in keeping with our guidance. Fourth quarter free cash flow, a non-GAAP financial measure, was $37.8 million as compared to $33.6 million in fiscal 22, an increase of $4.2 million. This increase, again, was primarily due to working capital improvements. We continue to have a strong balance sheet, and we will continue to utilize it by investing in our businesses to grow organically and by pursuing opportunities for inorganic growth. Please turn to slide 14. Fiscal 23 net sales were a record $1,179,600,000 compared to $1,163,600,000 in fiscal 22 an increase of 1.4%. This was our sixth year in a row of record sales. This year's sales had 57.3 million unfavorable foreign currency impact and 20.9 million favorable spot buy and premium freight cost recovery impact. Excluding the foreign currency and year-over-year cost recovery impacts, sales increased by 6.5%. The strength of the year was driven by our industrial segment EV product applications were 22% of sales in the year. Negatively impacting the year was the roll-off of a large automotive program in North America. Fiscal 23 income from operations decreased 19.1% to $90.4 million from $111.7 million in fiscal 22, mainly due to acquisition costs and material inflation, which were partially offset by higher sales volume. Adjusting for the acquisition cost of $6.8 million and costs related to the reorganization of a foreign subsidiary of $0.5 million, our non-GAAP adjusted income from operations decreased 12.5% to $97.7 million from $111.7 million at fiscal 22. Please turn to slide 15. Fiscal 23 diluted earnings per share decreased 22.2% to $2.10 from $2.70 per diluted share last fiscal year. The EPS was negatively impacted from the acquisition costs and material cost inflation, which were partially offset by a net tax benefit related to the reorganization of a foreign subsidiary. Adjusting for the acquisition cost of $6.6 million and net benefit related to the organization of a foreign subsidiary of $7 million, our non-GAAP adjusted diluted EPS decreased 22.6% to $2.09 from $2.70 in fiscal 22. Shifting to EBITDA, the full year EBITDA was $142.3 million versus $174.6 million last fiscal year, an 18.5% decrease. EBITDA WAS NEGATIVELY IMPACTED BY THE ACQUISITION COST AND MATERIAL COST INFLATION, WHICH WERE PARTIALLY OFFSET BY HIGHER SALES VALUE. ADJUSTING FOR THE ACQUISITION COST OF $6.8 MILLION AND THE COST OF $2.6 MILLION RELATED TO THE REORGANIZATION OF A FOREIGN SUBSIDIARY, OUR ADJUSTED EBITDA DECREASED 13.1% TO $157.1 MILLION FROM $174.6 MILLION IN FISCAL 22. PLEASE TURN TO SLIDE 16. Fiscal 23 net cash from operating activities was a healthy $132.8 million as compared to $98.8 million in fiscal 22. The increase of $34 million was primarily due to working capital improvements. Capital expenditure was $42 million as compared to $38 million in fiscal 22, an increase of $4 million. The increase was mainly a function of a low level of spending in the prior year as the spending level this year was within guidance. We expect significant increase in CapEx in fiscal 24 to increase capacity and capability for the increased launches in both fiscal 24 and fiscal 25. Free cash flow was $90.8 million as compared to $60.8 million in fiscal 22, an increase of $30 million. This increase, again, was primarily due to working capital improvements. Please turn to slide 17. Regarding forward-looking guidance, it is based on management's best estimates and is subject to a change due to a variety of factors noted on this slide. While we have experienced some success in price increases to offset the ongoing material cost inflation, we expect this headwind will still be with us in fiscal 24. The expected net sales range for fiscal 24 is $1,150,000,000 to $1,200,000,000. The expected diluted earnings per share range is $1.55 to $1.75. This fiscal year 24 guidance includes the Nordic-like acquisition, assumes an income tax rate of between 18 and 20 percent with no discrete tax benefits or expenses. It assumes CapEx in the 65 to 75 million range and assumes depreciation and amortization in the range of 57 to 62 million. The fiscal year 24 EPS cadence will be somewhat uneven with the first quarter being weakest, largely due to the anticipated contingent legal fees related to the heteronic lawsuit. We anticipate minimal sequential quarterly EPS growth from the fourth quarter of fiscal 23. Looking further ahead to fiscal 25, the expected net sales range is between $1,250,000 to $1,350,000. The midpoint of this range represents 11% organic growth from the midpoint of the fiscal year 24 net sales guidance range. The expected range income from operations as a percentage of net sales in fiscal year 25 is 11% to 12%. The fiscal year 25 income tax rate is expected to be between 20 and 22% with no discrete tax benefits or expenses. Don, that concludes my comments. Ron, thank you very much. Operator, we are ready to take questions.