Methode Electronics, Inc.

Good morning everyone and welcome to the Method Electronics first quarter fiscal 2025 results. At this time all participants are in a listen only mode and we will open for questions following the presentation. If anyone should require operator assistance during the conference please press star zero on your phone keypad. Please note this conference is being recorded. I will now turn the conference over to your host Robert Cherry, Vice President of Investor Relations. Robert, the floor is yours.

Thank you, Operator. Good morning, and welcome to Metho Electronics' Fiscal 2025 First Quarter Earnings Conference Call. For this call, we have prepared a presentation entitled Fiscal 2025 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 law. 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-K and 10-Q reports. On slide floor, please see an agenda for our call today. We will begin with an introduction of Method's new CEO, move to our key messages, and then provide a business and financial update followed by a Q&A session. Please turn to slide five. At this time, I'd like to turn the call over to Mr. John DeGainer, President and Chief Executive Officer.

Thank you, Rob, and good morning, everyone. Thank you for joining us for our first quarter earnings conference call. I'm joined today by Dave Rodden, our Interim Chief Financial Officer. Before we discuss the quarter, I'd like to take a minute and share why I came to Methode, what I have found so far, and what I think are the key messages for you to take away from this call today. First, I'm truly honored to be the new CEO of Method at this pivotal time for the company. I've long admired Method in my roles at adjacent companies in the industry, and I look forward to working alongside the team to deliver for all of our stakeholders. Over the past few weeks, I've had the opportunity to tour several of our facilities around the world and meet many of our regional teams, I've spent time learning about our operations, our products, and our people. I've also had a chance to hear about our history, which is filled with moments when our global engineering and manufacturing teams came together to solve complex problems, innovate new products, and create value for our customers and our shareholders. I see a company with a strong foundation built on years of operational excellence. Some of our plants are world-class, and I will be proud to show them to a customer. With my operations background, I can still see areas for improvement in each of our facilities. I look forward to working with the operations and supply chain leaders to improve each of our plans. If you're not familiar with my history, my track record includes enhancing businesses that require both operational and strategic improvement. Through a team effort, we drove those organizations to find unique and often latent value creation opportunities within the existing portfolio. I believe there are similar potential opportunities at Method, and I look forward to leading the team to capture them. Turning to slide six, not many companies can talk about a 78-year history, but Method can. However, all companies eventually go through periods where the business must evolve to move forward. Changing the solutions it develops for customers, the way in which it produces those solutions, and the way in which the organization works as a whole Method is at such a point, and consequently, we are beginning a journey to transform the business to position it for long-term value creation. To do so, our first priority must be to successfully execute on the large pipeline of new programs that must be launched in the next two fiscal years. In fiscal 2025, we have over 30 program launches that our customers are looking forward to, and in fiscal 2026, we have another 20 programs to launch. Any organization that faces this level of launch intensity will have its capabilities tested. At Method, we are relying on our history of execution and global collaboration to surmount these challenges. Simultaneous with the launches, we must focus on immediate actions to address total supply chain costs and efficiency. With the help of outside resources, we are pursuing a multifaceted approach to set a foundation for future success. We are all We are also actively building the executive team, including a new CFO and CPO, to support these challenges. On that note, I'd like to reiterate the news that we announced last week regarding our CFO transition. Laura Kowalczyk, the current CFO of Communication and Power Industries, has been appointed CFO of Method effective October 1st. She brings an impressive track record of delivering successful business transformations within our industry. I look forward to partnering with Laura to drive improvement at Method and welcome her to the Method team. Lastly, despite some headwinds in our markets, we are in a position to affirm our guidance for flat sales in fiscal 2025, followed by profitable organic sales growth in fiscal 26. Our plan is to leverage Method's strong foundation in order to reinvigorate and transform the business. But what does transform mean? Please turn to slide seven and let me elaborate. To start with, transform means resetting performance. That includes improving operational metrics, cost focus, and cost structure. It also means building and growing capabilities. That includes utilizing global best practices, improving our tools and systems, and driving standardization across the organization. Lastly, it means shifting our culture. That includes leveraging our global resources, acting with a sense of urgency and rewarding performance. In short, the organization needs to earn the right to write the next chapter of Methos history. I am confident that it will do just that. Returning to the quarter, let's begin on slide eight. Our sales were $259 million, and our adjusted pre-tax loss was $9 million. Our sales were down from the prior year mainly due to the roll-off of a previously disclosed EV lighting program in our auto segment. That program has gone end of life, but will impact our prior year sales comparisons for most of fiscal 25. Overall, our sales in the quarter were on track with our expectations. The lower sales volume along with the continued elevated costs from ongoing program launches drove the pre-tax loss in the quarter. Customer program delays also contributed to absorption challenges. However, Our efforts to improve gross profit contributed to the better-than-expected result. A loss is a loss, and we will never celebrate one, but it was good to see the sequential improvement. Turning to EV activity, their sales in the quarter were 18 percent of our consolidated total and a sequential increase from 14 percent in the fourth quarter. As previously communicated, we had a sizable EV lighting program roll off toward the end of fiscal 2024. and we are now at the beginning of a wave of new program launches for EV power applications. As such, we expect the EV percentage to grow even further and should be over 20% for our fiscal 25. While our sales are currently on track for the year, there are clearly headwinds in several of our key end markets. Those markets include automotive, commercial vehicles, construction, and agriculture. In addition to the EV market, In addition, the EV market has clearly lost some steam, particularly in North America, and its near-term outlook has softened. So while we are affirming our guidance for the year, we are keenly monitoring market conditions. On the order front, we have another solid quarter with over $80 million in annual program awards. OEMs are clearly reevaluating the adoption rate for the EV market. As such, the pipeline of potential bookings is subject to reduction and or delay due to customer decisions and or market conditions. Turning to the balance sheet, we are maintaining an acute focus on managing it and generating cash. As evidence, we reduced working capital by $9 million and improved cash from operations by over $16 million in the quarter. Lastly, our debt covenants were in full compliance at the end of the quarter and have our complete attention. In short, it was a stabilizing start to the year with better than expected performance on pre-tax income and cash flow. It was also encouraging to see the booking momentum continue. Turning to slide nine, the awards identified here are some of the key wins in the quarter and represent $77 million in annual sales at full production. This was our second consecutive quarter of solid awards. The launch timing of most of these programs could be anywhere in the range from one to three years from now. All awards were for power distribution products for applications in EV, defense, and data centers. After a lull in data center activity, we are now seeing a rebound in orders there. On slide 10, I want to provide some more color and details on the transition that we are navigating from a few large legacy programs to a multitude of launches of new programs. Methode has had a tremendous run supplying integrated center consoles to General Motors. As we have been communicating over the past few years, that program, for various platforms and models has been slowly rolling off. It's now expected to go end of life in fiscal 25. The result is a significant headwind in fiscal 25 and another lesser one in fiscal 26. The other major legacy program roll off we have previously communicated is for an EV lighting program. That program for Method went end of life in fiscal 24 and is thus a headwind for us in fiscal 25. Conversely, we are launching several EV programs for Stellantis in fiscal 25. That activity, along with a positive net impact from other launches, roll-offs, and market conditions, leads us to expect flat sales in 25 versus 24. Looking further out to fiscal 26, we expect even more launches of EV programs for Stellantis. That activity, along with a more positive net impact from other launches, roll-offs, and market conditions, will more than offset the final headwind from the GM roll-off, as well as a significant headwind from a major appliance program that is going end-of-life in fiscal 25. The overall net result is the expectation of organic sales growth in fiscal 26. As we navigate this product transition, we remain subject to market conditions, EV adoption trends, and the success of our customers' product launches. However, as of today, this is the line of sight we have, based on our projections and the forecasts of our customer base. Turning to slide 11. In summary, for the quarter, our sales were on track, while our pre-tax loss was better than expected. EV activity rebounded and was at 18% of sales. Key market headwinds, particularly in auto and commercial vehicles, are a concern. However, program awards were solid for the second consecutive quarter. Lastly, we maintained an acute focus on the balance sheet and cash flow, delivering a $9 million reduction in working capital and generating over $16 million in cash from operations. Going forward, we are beginning a journey to transform the business while positioning it for long-term value creation. Meanwhile, we are focusing intensely on executing over 30 program launches while taking immediate actions to address execution and costs. We simply need to return to better blocking and tackling and then we can move forward with a discussion on strategy. We are also building the executive team, including our new CFO and CPO, to support these challenges. Lastly, we are affirming our guidance for flat sales in fiscal 25, followed by profitable organic sales growth in fiscal 26. To be succinct, our fiscal 25 will be a year of transforming the business with a goal of returning the company to growth and profitability in fiscal 26. At this point, I'll turn the call over to Dave, who will provide more detail on the first quarter financial results.

Thank you, John, and good morning, everyone. I'd ask you please to turn to slide 13. First quarter net sales were $258.5 million compared to $289.7 million in fiscal 24, a decrease of 11%. On a sequential basis, sales decreased 7% from fiscal 24 fourth quarter. The main impact on sales in the quarter was the previously disclosed roll-off of an EV lighting program in Asia. That program ended toward the end of last fiscal year and had no sales this quarter. Also impacting this quarter was market weakness for our lighting products in the commercial vehicle, construction, and agricultural applications. That weakness was partially offset by growth in our auto sales in Europe. First quarter adjusted loss from operations was $4.7 million, down $10 million from fiscal 24. On a sequential basis, adjusted loss from operations improved $5.1 million from fiscal 24 fourth quarter. Please see the appendix for a reconciliation of all adjusted measures to GAAP. Income was negatively impacted both year over year and sequentially due to the lower sales volume. In addition, we continue to have high launch costs to support the numerous new program launches that John described. We also had a discrete legal fee in the quarter related to the headtronic litigation. Overall, our first quarter sales were on track with a full year of expectations. Turning to slide 14, shifting to EBITDA, a non-GAAP financial measure, first quarter adjusted EBITDA was $9.8 million, down $9.5 million from the same period last year. On a sequential basis, adjusted EBITDA improved $4.5 million from the fiscal 24 for the quarter. Compared to the prior year, adjusted EBITDA was negatively impacted by the lower sales and gross profit. On a sequential basis, adjusted EBITDA improved despite the lower sales as a result of higher gross profit. The higher gross profit was driven in part by price increases and lower warranty costs. Turning to slide 15. First quarter adjusted pre-tax loss was $9.1 million, down $11.6 million from fiscal 24. On a sequential basis, adjusted pre-tax loss improved $4.7 million from the fiscal 24 fourth quarter. Compared to the prior year, adjusted pre-tax loss was negatively impacted, mainly by lower sales. On a sequential basis, adjusted pre-tax loss improved, despite the lower sales, as a result of higher gross profit. The loss this quarter exceeded our guidance of similar to the recent fourth quarter performance. First quarter adjusted diluted loss per share decreased to a negative 31 cents from a positive six cents in the same period last fiscal year. On a sequential basis, the adjusted loss per share declined eight cents from the fiscal 24 fourth quarter. The adjusted earnings per share was negatively impacted by both lower sales and higher interest expense, both year over year and sequentially. This quarter was also negatively impacted compared to the prior year by higher tax expense due to the guilty tax treatment on foreign earnings. Overall, our first quarter adjusted pre-tax loss was on track with our full year expectations. Turning to slide 16, debt was down $34.9 million from prior year end. We ended the quarter with $111.3 million in cash, down $50.2 million. The primary use of cash was to pay down debt. Net debt, a non-GAAP financial measure, increased by $15.3 million to $184.7 million. The increase was due to the use of cash for other financing activities that exceeded our cash provided by operating activities. We are in compliance with all of our debt covenants at the end of the first quarter. Turning to slide 17. The first quarter's net cash from operating activities was $10.9 million as compared to a negative 5.6 in fiscal 24. The increase of $16.5 million was primarily due to improvements in working capital. First quarter capital expenditures were $13.6 million as compared to $13.8 million in fiscal 24, a slight decrease of $.2 million. First quarter free cash flow, a non-GAAP financial measure, was a negative $2.7 million as compared to a negative $19.4 million in fiscal 24, an improvement of $16.7 million. This increase is primarily due to reduced working capital. On a historical basis, this is a good start to the fiscal year for free cash flow. Turning to slide 18. Regarding forward-looking guidance, it is based on management's best estimates and is subject to change due to a variety of factors, as noted at the bottom of this slide. For fiscal 25, we are affirming expected net sales to be similar to fiscal 24 and adjusted pre-tax income to be approaching break-even. The adjusted pre-tax income for the second half of fiscal 25 is still expected to be significantly stronger than the first half. This fiscal year 25 guidance assumes depreciation and amortization of $60 to $65 million, capex of $50 to $60 million, and a tax expense of $9 to $11 million. The tax expense is mainly a function of the valuation allowance on deferred tax assets of $4.3 million that we recorded in the first quarter and the expected guilty tax treatment for the full fiscal year. Looking further ahead to fiscal year 26, we are affirming expected net sales to be greater than fiscal 25 and pre-tax income to be positive and notably greater than fiscal 25. This concludes my comments, and we can roll up to questions.

Thank you very much. At this time, we'll be conducting our question and answer session. If you would like to ask a question, please press star 1 on your phone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two if you would like to remove your question from the queue. For any participants using speaker equipment, it might be necessary to pick up your handset before you press the keys. Please wait a moment whilst we poll for questions. Thank you. Your first question is coming from Luke Young of Baird. Luke, your line is live.

Great. Thank you for taking the question. Good morning, everyone. Hoping I could start, John, with the gross margin, especially within automotive specifically. You mentioned the improvement that we saw sequentially in the quarter. Hoping we could just unpack that. Clearly, gross margin, especially in auto, has been under pressure the last few quarters. Launch costs, overhead cost absorption, I know there's a lot going on there. Can you just unpack what went right this quarter? Sure. in terms of gross margin and auto especially, and how we should think about that as being sustainable as we look at the next couple of quarters? Thank you.

Luke, good morning, and thanks for your question. I think it's important to understand that the team has been working hard not only on the launches but on driving operational improvements. So what you're seeing is both the impact of operations improvement, particularly in North America and in our EMEA regions, impact of price increases that have been passed on to the customers, work that's been done on price reductions with our supply base, and then some of the impact of some of the cost reductions that we've talked about in previous quarters. So these are ongoing improvements that will continue to gain momentum on a quarter-over-quarter basis and why we feel confident in the progress that we talk about here.

Got it. Thank you for that. Second question, a little bigger picture, and it's in terms of the interface business and the appliance roll-off that you're looking at. In fiscal 26, just how does that impact your view of the business? It would seem like sales are going to come down a lot there just in terms of the strategic relevance going forward and then managing that specific earnings headwind from that roll-off. Thank you.

Yeah, so the interface business was, as I'm coming to learn, was critical for us as we launched the GM business and launched some of the other past interface business on the automotive side. What you're seeing us starting to look for is how do we find synergies between the different segments and how do we you know, how do we create some synergistic value between our lighting business and our industrial controls business and other areas. So we do have some new appliance programs, so it's not just bad news from an appliance side. But when you talk about all of the launches that we have that we mentioned multiple times, 30 this year and over 20 next year, We mentioned this in the last earnings call, and we talked again here. The trough that we're seeing from a sales perspective is really being filled by a whole series of exciting new programs that are aligned with what we see as the megatrends in the space. So I'm quite confident about where we're going and the opportunity for us to be aligned with where the different industries in which we play are going as well.

Got it. And then my last question. John, just great to get your perspective. You know, some improvement plans were, you know, had already been outlined for the organization as you came into the CEO seat. It is great to understand kind of your focus for the first 90 days on the job, just how you're prioritizing your time, some of the structures that you've put in place with your leadership team, obviously some folks still coming onto that team, and maybe any other kind of initial focus areas that would be worth highlighting. Thank you.

Yeah, so as we said multiple times during the call, our first priority is making sure that we do these launches right. So it's why I've made it a point to get to the regions. I'll make it to the last major region of China here in a couple weeks to make sure that I understand the challenges that the regions are facing and then also to be talking to customers. So the first priority is making sure that we're talking about the regions in our launches. Secondly, is in some specific launches to make sure that we're supporting our customers appropriately. I've had those first rounds of customer meetings. So that's priorities, if you will, number one and number two. Number three is really driving an integrated financial improvement approach. So it's not just what are we doing to cut costs, you know, the headcount reduction, but it's a holistic approach perspective on how do we use the outside resources that we have working with us, as well as the internal teams to be driving scrap reduction in the plants, be driving inventory reduction in the facilities, be looking at our total supply chain, as well as what do we do with regard to additional pricing opportunities with customers, and looking at the entire thing holistically. As we add capability, like with John Irwin as the CPO, and as Dave and Laura transition, I feel really confident that we're building an organization that will be thinking more and more numerately every day and in all of the areas that allow us to drive a holistic continuous improvement approach. And then I guess the last priority for me is making sure that we build out that leadership team that sets the stage for the next phase of the method, if you will, the next phase of the method history. So when we say we need to earn the right in front of our shareholders and in front of our customers and in front of our organization to write the next phase of the history, that comes down to leadership. And what do we do to take the 7,000-plus person organization with a 78-year-old history and set the stage for the next months, years, and decades ahead?

It's all very helpful. I'll go ahead and pass it back. Thank you. Thanks, Luke.

Thank you very much. Your next question is coming from John Franz Reb of Sidoti & Company. John, your line is live.

Good morning, and John, welcome aboard, and thanks for taking the questions. Thanks very much, John. I'd like to start with the guidance. Despite lower revenues sequentially and higher operating and pre-tax profit sequentially, you kind of maintain the outlook for the year. I'm curious if that suggests any change in the past two months in market conditions versus what you're looking for at year end.

Not really. We're taking a look at this. We're actually being cautious in how we forecast things. The year still has to play out. We have a good start to the year. I shouldn't say good. As John says, you never want to celebrate a loss. But it was better than what we were hoping. or we were expecting. But we're still going to keep the guidance where it is just until we get a little bit better track record of how we go forward in the quarters.

And John, let me just build on what Dave said is it's our responsibility to make sure that we're credible. And credibility comes down to doing what we say and achieving above what we say as opposed to some of the back and forth that we've had historically. And so when we look at the headwinds in our different end markets, we look at the challenges with regard to the launches and just some of the exogenous turbulence, we thought it was prudent for us to affirm our revenue guidance and affirm what we said in the last quarter, but not go any further with that until, recognizing the fact that I've been here two months. and Dave's been in his role for a couple months as well. So, making sure that we're prudent in the way in which we lay this out and explain to our investors is why we've approached it this way.

Male Speaker 1 Fair enough. Just wanted to make sure. Male Speaker 2 Yeah, thank you. Male Speaker 1 I'm actually curious about the price increases that you referenced in your prepared remarks. Pricing has been an issue for quite some time. I'm curious on two things. How much did price impact the gross margin profile in Q1 versus Q4? And two, how much do we, runway do we have left on getting more price gains on a go-forward basis?

Yeah, so we don't typically, John, give the sort of detail on exact impact on a quarter-by-quarter basis. But what I can say to you is, as we have looked a little more rigorously at are some of our programs and some of our longer running programs as well as the new things. It's forced us to go back to customers and in some situations where you have an even new program delay, it requires us to go back to customers because we have capital and we have inventory that we have put in place. in order to support a ramp up. So when I responded earlier about the numeracy and how we think about these things, each of our programs, be they long-term programs or new programs, we're looking at the financial performance of those programs and going back and saying what is our responsibility and what is it that is a customer's responsibility and how do we go have very clear, transparent conversations with our customers. in all of the businesses.

Okay. It's certainly a worthy endeavor. Lastly, you mentioned in your comments going after supply chain costs. Certainly, that's after you handle your launch, successful launch into programs. But what is the opportunity in the better procurement on the supply chain?

Yeah. So, we've had both outside help as well as the fresh eyes of John Irwin, our new chief procurement officer, really looking at how we buy, looking at where with how the organization was structured, where there might be the same thing purchased from multiple places, but also how do we schedule and how do we order material. You can look at our inventory and say that we are certainly not as optimal as we'd like to be from an inventory standpoint. So as I think about supply chain costs, it's not just the procurement price, if you will. It's not a price-to-price comparison solely. It's a total supply chain cost. What do we do with regard to how we ship material, how much material, how much inventory is sitting on the plant floors? All of those areas allow us to optimize our cost structure. And that's the way John is leading it and the operations team is thinking about it in each of the regions as well as with the outside support to help John on those.

Okay. Actually, I'll leave it there and let somebody else chime in. Thank you for taking my questions. Thank you, John. Appreciate it.

Thank you very much. Just a reminder, if there are any remaining questions, please press star 1 on your phone keypad now to join the queue. Your next question is coming from Gary Prestapino of Barrington Research. Gary, your line is live.

Thank you. Hi, John. Welcome back. David and Robert, a couple of questions here. First of all, let me jump around a little bit here. When you're talking about your guidance on pre-tax income for this year and next year, is that on an adjusted basis or a gap basis?

That would be on an adjusted basis.

Okay. I just want to make that clear. Okay. So I'm looking at your balance sheet, okay, and I'm seeing a pretty dramatic increase in inventories. I think I got clocked at 18%. on a sales decline in the quarter, and this is on a sequential basis. So maybe could you explain why those inventories are up as high as, you know, with the growth relative to the sales being down? Is that due to these program launches that you're going to undertake?

Yeah. So, Gary, I'll take this, and I'll let Dave add if he's got any additional color. Okay. We have to, particularly for long lead time materials, we have to put things in the pipeline based on a customer, based on our best assumption with regard to customer volumes and ramp up. And so when you have a delay in a launch, you've got a pipeline that's already started, that's already filled or started to be filled at a certain So when I say to you some of those inventories are this mismatch between what we plan from a ramp-up perspective and what's actually happening, it doesn't mean that we won't use the material. It just means that there is a cost to it of it sitting on our plant floors. And so it goes back to what I said earlier. We're having to go back to customers and talk about holding costs and all those sort of things. So we're... There are certainly opportunities for inventory optimization and supply chain optimization, and that's one of the key things that John will be working on. But what you're seeing here is not as much about an execution stumble as it is just delays in launches.

Okay. So that gets me to my next question, John. I don't mean to be nitpicky, but when you're putting out your sales bridge here, you've got Stellantis program launches, you've got 84 million for this year, 125 million for next year. First of all, are you at liberty to discuss the models that you're going to be launching products on? And are they any hybrid or just ICE?

So they're EV programs, and we talked about that, that these are EV programs. But we're not at liberty to talk about specific program, specific platforms. But It's how you end up going from 14% EV to 18% EV in a quarter and to what we talked about of being over 20% going forward in the rest of the fiscal year.

Okay, so with this number that you have, and I'm just trying to get a handle on how are, is this right now what Stellantis has said is going to be their take rate from you guys? Or is this based on what they are projecting their models to be? Because what I'm trying to get around, John, is that Philanthus is having really difficult problems with inventories on their lots. And I'm just trying to get an idea of how you're sizing this number.

So certainly we have to be... smart about how we think about these things. And Gary, as we talked about in previous lives, we both look at what customer releases are, but also then what do we see from an IHS perspective? And so this is with a confidence waiting against it, but understand also that we may have some other economic actions that we take depending on how the ramp up goes. So a revenue for us may not be a part-to-part correlation with their ramp up. So we watch this in detail. Remember also that we have launches that are around the world. So it's easy to get distracted in North America with regard to news on EVs, but from a penetration perspective of EVs and the more advanced hybrids actually in the rest of the world, and we're spread all around the world, China and in Europe. It's a bigger percentage of sales, and we're providing power products in those regions as well.

Okay. Thank you. So then the other thing that I just wanted to touch on, John, is... think in your opening comment you said you've been to some of your plants worldwide and one of the things you said there's areas of improvement um sure without you know obviously dwelling too much detail um is the areas of improvement dealing with throughput scrappage Particularly, I guess, I'm addressing what has been happening in Mexico, too. And can this be rectified with your current personnel at these various plants? Or leadership at these plants?

Yeah, so let me give a shout out to the guys in Mexico. Not only... I mentioned in my remarks that there are plants that are world class and I would be really proud to take a customer to the Mexican facilities are a couple of those plants. And yes, we had fairly significant scrap and premium freight issues in fiscal 2024 part of part of the progress on a year over year basis is actually the operational improvement that has happened in our Mexican facilities. It does not mean that we are done. There is a lot of productivity activities to be done there. There's a lot of improvement, and Philip Ferugia and the team down there understand very clearly what challenges they have in front of them. But it's a very important portion of the company, and I am absolutely confident of that leadership team and their ability to take not only the progress that they've made, the feedback that I've given them, the help that we are giving them from the outside to make those facilities in Mexico much, much better.

Okay. Thank you. Wish you best of luck. Well, thanks, Gary. I really appreciate it.

Thank you very much. Your next question is coming from John Franzreb of Sedoti and Company. John, your line is live.

Yeah, just a quick question on the guidance, and this is really the tax expense line that you have, $9 to $11 million. Is that a gap number compared to some of the other adjusted numbers that you have as a non-gap number?

That would be an estimate of what the gap tax would be for the year. Right.

Okay. All right. we have to kind of adjust out what happened in the first quarter and make some assumptions on a go-forward basis that will balance those two out, right? That's how we should think about it?

I would think about it as, you know, we recorded the – what we recorded in the first quarter to $5 million, and we expect that for the year it would be about 9 to 10. I'm sorry, 9 to 11. Okay.

And just another thought on as the EV programs start to roll out, how should we be thinking about the contribution margin on the new EV programs relative to what you've been getting in the recent automotive side of the business?

John, I actually, based on some programs that I reviewed yesterday, I actually feel really good about where we are from a contribution margin standpoint. We've got a lot of execution challenges, and we need to make sure that we're driving a performance appropriately. But based on what I'm seeing from the initial programs and where the financials are, I think it is at a minimum on par, if not accretive, from a gross margin perspective.

Great, great. Thanks for taking my follow-up, sir. I appreciate it. Thanks, John.

Thank you very much. Well, we appear to have reached the end of our question and answer session. I will now hand back over to John for any closing remarks.

Yeah, thank you, Operator, and I want to thank all of the people who joined us today for your time and for your interest and method. As a leadership team, we're committed to, if you will, earning your trust and building the capability of this organization, and we look forward to talking to you again in the next quarter. Thanks very much.

Thank you very much. This does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.