Methode Electronics, Inc.

Greetings and welcome to the Methode Electronics first quarter fiscal 2024 results call. At this time all participants are on a 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, VP of Investor Relations. Sir, you may begin.

Thank you, Operator. Good morning, and welcome to Meta Electronics Fiscal 2024 First Quarter Earnings Conference Call. For this call, we have prepared a presentation entitled Fiscal 2024 First 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. 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 and 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. Thank you for joining us for a fiscal 2024 first 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 on slide four. Our sales for the quarter were a solid $290 million. They were up 3% compared to the prior year, mainly due to $21 million in sales from the acquisition of Nordic Lights. Excluding Nordic Lights, foreign exchange, and a significant drop in customer reimbursed materials bought by and premium freight cost recovery, sales were down 2%. The decrease was mainly due to lower sales in our auto segment, which was partially offset by higher sales in the industrial segment, driven by lighting solutions for commercial vehicles. With the addition of working lights from Nordic and the ongoing contribution from our existing interior and exterior lighting solutions for commercial vehicles and automotive, Method is clearly building a lighting solutions franchise that complements our growing business and power distribution solutions. In the quarter, we experienced very unmethod-like operational challenges. Operational inefficiencies in our North American auto operations caused mainly by salary personnel turnover, poor operational decisions, and vendor issues, which led to subsequent production planning deficiencies. This in turn had a domino effect, leading to inventory shortages, unreimbursed spot purchases and premium freight, and some delayed shipments. While the full picture is nuanced, I can share with you the essence of what occurred. Our Monterey operation has historically manufactured with a low mix and a high volume of product. Recently, the operation has transitioned into a mode of higher mix and lower volume. This transition, combined with the aforementioned issues, led to exposure of latent operating inefficiencies that our early warning system detected, but we failed to mitigate, also very unmethoed. In a lean manufacturing environment, a delay in visibility of a problem can ultimately generate significant costs in the form of premium freight and spot buying, both necessary to immediately address material shortages and maintain customer delivery integrity. In auto, delivery in addition to quality is absolutely paramount to both maintaining and obtaining new business. These operational challenges had approximately 15 cent impact on our first quarter earnings relative to our expectations. We also had accelerated expenses related to the numerous program launches. I can confidently tell you these operational challenges have been identified and corrective action plans are already in place, including the hiring of former seasoned planners in the U.S. However, the residual effects are expected to impact our second quarter to approximately the same degree, and along with a significant weakening in the e-bike market, are the primary drivers to our lowering earnings guidance for the full year. As I said, this was very unmethoed, and I have been and will continue to be personally involved with the efforts to correct the situation. On that, you have my personal commitment as the CEO and as a shareholder, we will fix this. Moving to orders. We had a solid quarter with over $70 million in annual program awards. These programs are once again led by electric vehicle programs. turning to medical. After pursuing multiple strategic avenues for DeBeer, including everything from a formal sales process to the continued operation of the business, it became abundantly clear that a discontinuation was the best financial path forward. I want to thank the DeBeer and Method employees associated with the business for all their efforts, as well as the customers who provided the opportunity to market the DeBeer product. Turning back to EV activity, sales in the quarter were 22 percent of our consolidated total. In new awards, we won over $30 million in annual EV programs. For fiscal 2024, activity will be strong, but we'll still be very dependent on OEM take rates as well as the timing of program roll-offs. In the quarter, we had an increase in debt, which was driven by an investment in working capital to support our sales and program launches. While our debt and consequently our leverage has increased, it is still relatively low. As such, we are very comfortable with our flexibility for capital deployment, whether it is for internal investments, share buybacks, or additional acquisitions. As is typical in our first quarter, due to payments for year-end items, we had negative cash flow in the quarter. However, we fully expect to return to positive free cash flow in the second quarter and have meaningful positive free cash flow for a full year. Moving to slide five. The awards identified here represent some of the key wins in the quarter and represent $70 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 also continue to be weighted towards the United States, where EV quoting activity continues to be strong. In other areas, we're awarded programs for lighting solutions in auto and sensor solutions in e-bike, although not launching until fiscal 2026. Turning to slide six. In summary, sales in the quarter continue to be solid, including for EV applications. The Nordic Lights integration is progressing well. and we expect to own 100 percent of the shares by the end of the second quarter. The program-aware pipeline continues to be healthy, especially in EB. Lastly, the quarter included an unacceptable lapse in operational efficiency. My immediate focus, as well as the entire management team's focus, is on correcting those inefficiencies. As I have stated, the operational issues have been identified, and corrective actions are underway. We will also continue to have a heavy focus on executing our new program launches. Turning to our outlook, due to program roll-offs and the expected weakness in key markets, especially e-bikes, we continue to expect low 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 to ensure a successful 2025. This activity, along with multiple years of strong awards, is expected to enable us to not only replace the sunsetting programs, but to organically grow the business 12 percent from fiscal 2024 to fiscal 2025. Our view on fiscal 2025 has not changed. This guidance demonstrates that our business model is healthy and is positioned to prosper from the strategic direction that we have taken into lighting and power solutions to grow the business. Before I conclude, I would like to address the recent announcement of my retirement. Leading Method has been a tremendous personal and professional journey for me, and I am incredibly proud of all our team has achieved to grow the company. Having served 19 years as CEO, it is simply time for me to step down and enable the next successful stage of the Meflo journey to begin. I am extremely confident that the company will continue to flourish given the exceptional team in place and a solid strategy that is positioned for growth. I truly believe that Meflo's brightest days are still ahead. Meanwhile, I will continue to actively lead the company until the successor has been named And then we'll work with the new CEO through an extended transition period, which is expected to conclude sometime in fiscal 2025. At this point, I'll turn the call over to Ron, who will provide more detail on our first quarter financial results, as well as more details on our outlook.