Methode Electronics, Inc.

Greetings and welcome to the Method Electronics second 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, Vice President of Investor Relations. Sir, you may begin.

Thank you, Operator. Good morning, and welcome to Metro Electronics' Fiscal 2024 Second Quarter Earnings Conference Call. For this call, we have prepared a presentation entitled Fiscal 2024 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 Runner 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 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 second 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 $288 million. Sales were down year over year, primarily due to program roll-offs, a tough comp to the prior year in Asia due to COVID-delayed sales in China, continued softness in the e-bike market, and, of course, the impact from the UAW strike. All of these headwinds hit our auto segment. Sales in the quarter were helped by the acquisition of Merck Lights in the industrial segment. Turning back to the auto segment, in the quarter, we were required to take a non-cash goodwill impairment totaling $57 million related to the North American Auto and European Auto Reporting Units. Ron will go through the financial mechanics later in the call, but the summary of the situation is that with the recent operating property weakness in our North American auto reporting unit, the accounting rules required us to review our goodwill, which in turn led to the impairment. Also in the quarter, we continue to experience operational inefficiencies in our North American auto operations that manifested in the first quarter. As you may recall, they were caused primarily by salary personal 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 labor. In a lean manufacturing environment, disruptions like this can ultimately generate significant costs to address material shortages and maintain customer delivery integrity. In auto, Delivery, in addition to quality, is absolutely paramount to both maintaining current and obtaining new business. I want to stress that we have not let our internal inefficiencies negatively affect our customers. We also continue to see increased expenses related to our numerous new program launches, some of which are now also being delayed. I am confident that these operational challenges have now been largely identified and corrective action plans are actively being executed. However, the residual effects are now expected to linger longer than we previously communicated and will impact the remainder of our fiscal year. In fact, they are the cause of approximately half of our reduction to adjusted earnings guidance for the full year. It is not lost on me that last quarter, we were overly optimistic with the time required to remedy this situation. On a more positive note, we are pleased with the Nordic Lights acquisition, which is now fully under methods control. The business is performing as expected and integration efforts are underway. Moving to orders. We had a modest quarter with over $20 million in annual program awards. These programs are once again led by electric vehicle programs. As we often communicate, our order trend is rarely linear and often ebbs and flows. I can share that the pipeline of potential awards remains strong. In fact, we have near-turn opportunities to win business due to smaller bus bar competitors who are not performing to the OEM's expectations. Turning back to EV activity, sales in the quarter were 19% of our consolidated total. In regards to awards, We won over $15 million in annual EV program awards in the quarter. For fiscal 2024, sales activities will be strong, but we'll still be very dependent on the OEM take rates as well as the timing of EV program launches. In the quarter, we had an increase in debt, which is driven by an investment in working capital to support our sales and launches. While our debt and consequently our leverage has increased, it is still at a reasonable level. As such, we're very comfortable with our flexibility for capital deployment, whether it's for internal investments or share buybacks. With the Nordic Lights acquisition behind us, we resumed our share buyback in the quarter, acquiring just under $8 million in shares. Given the low net income in the quarter, we consequently had negative cash flow. With the expected lower net income for the full year, We now expect free cash flow to be neutral for fiscal 24 but will be positive in fiscal 25. Turning to slide five. In summary for the quarter, sales were solid despite several headwinds. The Nordic Lights acquisition is complete and the business is performing well. We continue to have a heavy focus on improving operational efficiency and executing new program launches. Lastly, we resumed our share purchase program. Looking at the remainder of Fiscal 24 and into Fiscal 25, we have a definitive path forward and I would like to clearly articulate. Our Fiscal 24 has been challenged by auto program roll-offs and market headwinds in commercial vehicles, data centers, and e-bikes. The year has also been hindered by unacceptable but fixable operational shortcomings, which are taking longer to resolve than originally anticipated. Lastly, we've experienced substantial price cost pressure during the year, which we're addressing via pricing and increased cost improvement initiatives, such as vendor price reduction and value engineering. As such, fiscal 24 is a pivotal year of investment and transition with the objective of a clean start to fiscal 25. As mentioned, we're launching over 20 new programs this year, which require significant investment and resources. That ongoing investment is in items like facility preparation, product qualifications, staffing and training expenses, along with the additional costs required to ensure that our operational issues this year have required us to lower fiscal 2024 guidance. For our third quarter, we now expect a modest improvement over the second quarter. We then expect further improvement in the fourth quarter. Turning to fiscal 25. Our outlook continues to be positive, supported by multiple years of strong awards. However, the year will be very dependent on a number of items, including but not limited to EV OEM launch schedules and take rates, a rebound in the e-bike, commercial vehicle, and data center markets, and further market inroads with our lighting franchise. While we have confidence in our ability to execute in that environment, some factors will simply be out of our control. Of particular concern is the EV market. Our outlook for EV remains very positive long term, but in the near term it is tempered by program delays and moving take rate projections. However, we have no doubt that this market will fuel our growth over the next three years. As such, we've reduced our guidance for fiscal 2025 mainly due to the EV market trends. To illustrate, we've had one major EV program get partially delayed from fiscal 25 to fiscal 26. To summarize, we're decisively making the investments in fiscal 24 to ensure profitable growth in fiscal 25. We firmly believe that our business model is healthy and is positioned to prosper from this strategic direction that we have taken into lighting and power solutions to grow the business. Turning to slide six, in order to give you a more granular picture of our sales guidance, we've updated the bridge that we provided last fourth quarter for our guidance walk from fiscal 23 to 25. Our program roll-offs, while still sizable, have been less this year than expected, but will be now more next year. However, the most notable change is that new program launches in fiscal 25 have been reduced by approximately $70 million due to customer delays into fiscal 26. Together, these drivers have caused us to lower our fiscal 25 guidance by $100 million at the midpoint. At this point, I'll turn the call over to Rob, who will provide more details on our second quarter financial results, as well as more details on our outlook.