Q4 2020 Methode Electronics Inc Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the Minnesota Electronics fourth quarter fiscal 2020 results call. After the presentation. There will be a question answer session. If you should require assistance during the call. Please press star zero in an operator will assist you.
This time, it's my pleasure to turn the floor overt to Mr. Rob Cherry Vice President of Investor Relations, Sir the floor is yours.
Thank you operator.
Good morning, and welcome to mess electronics fiscal year, 2024th quarter earnings Conference call.
Well this call we have prepared a presentation entitled its fiscal 2024th quarter and full year financial results, which can be viewed as a webcast of this call were found that meant that.
In the investors section.
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 here.
These forward looking statements are subject to the safe Harbor protection provided under the securities laws.
Minnesota undertakes no duty to update any forward looking statement to inform the statement to actual results or changes in met those expectations on a quarterly basis or otherwise.
The forward looking statements in this call involve a number of risks and uncertainties.
The factors that could cause actual results to differ materially from expectations are detailed in Minnesota filings with the Securities and Exchange Commission.
Such as their annual and quarterly reports.
Such factors may include without limitation to following.
Impact from handedness, such as the coded 19 pandemic.
Dependence on the automotive appliance commercial vehicle computer Communications industries.
Depending on a small number of large customers, including two large automotive customers.
International trade disputes, resulting in tears and our ability to mitigate tariffs.
Timing quality and cost of new program launches.
Building to withstand price pressure, including pricing reductions.
Failure to attract and retain qualified personnel.
Ability to successfully market and so did beer surface products.
Currency fluctuations.
Customary risks related to conducting global operations.
Cost associated with environmental health and safety regulations.
Ability to withstand business interruptions.
Recognition of goodwill and long lived asset impairment charges.
The ability to successfully benefit from acquisitions and divestitures.
Investment programs prior to the recognition of revenue.
Dependence on the availability and price a materials.
Dependence on our supply chain.
Josh <unk> related to accounting for tax payment solutions.
Income tax rate fluctuations.
Ability to keep pace with rapid technological changes.
Impacts to our information technology systems.
Ability to avoid design or manufacturing defects.
Costs associated with reorganization activities.
The ability to compete effectively.
Nobody to protect our intellectual property.
Success of a great time, and or our ability to implement and profit from new applications of the what acquired technology.
Significant adjustments to expense related to our performance based stock awards in our long term incentive plan.
Ability to manage our debt levels in any restrictions there on here.
And the impact to interest expense from their placement or modification life work.
At this time I'd like to turn the call over to Mr., Dan do that President and Chief Executive Officer.
Thank you, Rob and lumped in domestic showed.
Good morning, everyone and thank you for joining us today first fiscal 2024th quarter and full year financial results Conference call.
I'm joined today by rounds, unless our chief financial officer old side, and I have opening comments. It afterwards, we will take your questions.
First I would like to note that our fiscal 2020 accounting period included 52 weeks.
52 weeks for fiscal 2019.
So the fiscal 2020 results include 12 months of great Cod activity as compared to seven habits of grey card activity in the fiscal 2019 results.
As you can sleep see on slide four I would also like to draw your attention to our refreshed corporate and Investor Relations web sites.
We believe both provide an improved user experience as well as better dumped and visibility.
<unk>.
Please turn to slide five.
That's that's full year revenue increased 2.4 present, our net income increased 34.7% and our diluted earnings per share increased 34.2% for the fiscal year ended may 2nd 2020.
All three financial measures were a record from episode.
The cost reduction and operational efficiency initiatives that we implemented in fiscal 2019 provided the savings we expected in fiscal 2020.
On a non-GAAP basis, our adjusted net income increased 5.7%.
And adjusted diluted earnings per share it was up 5.4%.
These adjusted measures exclude expenses for initiatives to reduce overall costs and improve operational profitability.
Position related costs long term incentive plan accrual adjustments.
And the transition tax benefits from U.S tax reform in the applicable periods.
As you can see and both GAAP and adjusted basis. It was a commendable performance for the here that drove record free cash flow increasing over 48% for fiscal 2019.
On slide six because our full year revenue bridge, which included the benefit of an extra Florida have not so great kind of activity and 76 million in sales from new program launches.
Speaking of Gray, Ken I'm Happy to report said, we completed the integration and are pleased to the acquisition delivered the results we expected.
Adversely affecting your was the you lay w. labor strike that occurred in our second quarter.
And the impact from Cobot 19 in the fourth quarter.
After the negative impact from foreign currency exchange the full year revenue performance was still up approximately 24 million to a record level.
In regard to covert 19, our focus continues to be on the health and safety of our employees.
Sean incredible dedication to method and our customers in light of extraordinary circumstances across the globe.
Given this health crisis and business disruption, we implemented measures to manage cost preserve liquidity and most importantly address employee safety.
The safety measures include enhanced cleaning and disinfecting procedures at our facilities the promotional social distancing a majority of office staff working from home and stringent factory in office protocols for proactive coated 19 mitigation.
That's it was able to apply the early lessons learned in its Asian operations, developing actually protocols to deal with Goldman 19, and leverage them in their plans at facilities on the rest of world.
Has the pandemic spread.
As a result at least mitigations and given the essential nature of some of our businesses all of our facilities remained open to a certain degree and operated at levels commensurate with customer orders.
In fiscal 2021, we will continue to see significant headwinds, especially in the first quarter from the Golden 19 pandemic.
However, I want to stress that we will continue to invest in our businesses for the long term.
Moving to slide seven.
During the fourth quarter, New awards in the automotive and industrial segments continued to capitalize an important trends, including vehicle electrification and the incorporation of LNG lighting and sensors to augment safety.
We're very pleased that we booked over 36 million in new and the business in the fourth quarter, what their total fiscal 2020 exceeding 141 million.
In the quarter unless it was awarded several key programs tied to our ongoing strategy.
In electric vehicles, we were awarded programs for Busbars, an AC power connectors totaling $10 million annually.
In sensors were awarded a program in China for E bikes for 2.3 million annually.
In vehicle exteriors, we were awarded initial integrated Tailgate module program for a Japanese auto OEM for 1.7 million.
As we have successfully accomplished over the past method will continue dwell Bob its business with new technology and products such as our unique sensors led lighting and power solutions for them to build goals.
And we will develop innovative products for new applications like remote controls for industrial drones, which isn't up and coming market for our Hetronic business.
And the medical segment, our efforts to grow the beer product line in the quarter were hampered by the postponement of electric surgery or elective surgeries due to colder 19.
When the pandemic subsides and I suppose returned to normal we believe that business will return to a growth trajectory.
Looking forward, we're not providing annual guidance for fiscal 2021 to the ongoing market uncertainty and the resulting lack of customer demand visibility due to the Golden 19, Pandemics, which includes our fiscal first quarter.
Most auto and commercial vehicle production was shut down before the beginning of our fiscal 2021 first quarter until approximately mid June or roughly the first half of the quarter.
When production did result, the demand was irregular and we continue to see volatility and forecast as of today.
As such any quarterly guidance, we were to give wouldn't be heavily weighted to delight and would carry a range of uncertainty that would not provide meaningful insight.
Well, we're not providing any guidance at this time, we do intend to delay partially or guidance at a future date as soon as demand schedule stabilize and we are confident with their customers forecasts.
As part of our continuous improvement strategy in an effort to manage costs and cash method is taking further actions to consolidate aberrations and further streamline organization in order to improve efficiencies and set the stage for continued growth.
These actions will allow us to further improve on her SNA as it pertains to the sales.
And being a better position to capitalize on opportunities as they present themselves.
To conclude given the current global macroeconomic situation and the significant headwinds say stay method throughout this past fiscal year.
I am extremely pleased that our strategy and team was able to deliver record revenue and income and generate record free cash flow.
That said our focus now ill now turn to continuing to navigate coven 19, while executing our long term strategy as we enter a new fiscal year.
At this point I'll turn the call over to run who'll provide more detail our financial results fraud.
Thank you Don and good morning, everyone.
Please turn to slide eight.
Fourth quarter sales decreased 20.8% or 55.4 million to 210.6 million in fiscal 20 from 266 million in fiscal like [noise].
Sales in the fourth quarter were negatively impacted by cold in 19, especially in the mid to late March and April timeframe.
These production shutdowns, most of which impacted the automotive and industrial segments continued through the end of the for the fiscal fourth quarter and had a negative impact of approximately 85 million net sales.
Foreign currency exchange continues to be a headwind as both the euro and renminbi exchange rates were weaker than the prior year, reducing net sales in the quarter by 3.5 million.
On a GAAP basis fourth quarter net income increased 7.5 million to 30.1 million or 79 cents per share.
From 22.6 million or 60 cents per share and the same period last year.
Fourth quarter GAAP net income benefited from the adjustment of long term incentive accruals of 6.5 million and higher other income of 5.5 million, primarily due to higher international government grants inclusive of cold in 19 assistance.
In addition, we realize benefits from initiative to reduce costs improved profitability taken in fiscal 2019, which included lower expense for those actions in the current fiscal year versus last fiscal year.
Adjusted net income and non-GAAP financial measure was 25.4 million or 67 cents per diluted share as compared to 23.5 million worth 62 cents per diluted share in the same quarter of fiscal 2019.
Adjusted net income excluding expenses for initiatives to reduce overall costs and improve operational profitability acquisition related costs and long term incentive plan accrual adjustments and the applicable periods.
Moving to gross margins on slide nine.
Fourth quarter GAAP gross margins were higher in fiscal 2008 as compared to fiscal 19 and benefited from the sales mix within the automotive and industrial segments.
Clothing increases in sales and increased sales in the interface segment.
Well were negatively impacted by sales volume reductions due to the impact of cold at night.
And foreign currency translation.
Non-GAAP adjusted gross margins, a financial measure, which excludes expenses for initiatives to reduce cost and improve profitability and purchase accounting adjustments in the applicable period were higher in physical 20 as compared to fiscal 19.
Fourth quarter gap in selling and administrative expenses as a percentage of sales decreased 370 basis points year over year to 8.6% compared to 12.3% in the fiscal 19 fourth quarter.
The fourth quarter attributable what the figure was attributable to long term incentive plan accrual adjustments lower performance based cash compensation expenses and lower salary resulted from the cobot 19 cost saving actions.
Adjusted selling and administrative expenses as a percentage of sales a non-GAAP financial measure decreased slightly to 11.6% from 12% in the fiscal 2019 fourth quarter.
This is this included exclude acquisition related costs expenses for initiatives to reduce overall cost and improve profitability and long term incentive plan accrual adjustments in the applicable period.
Moving to a year to date margins on slide 10.
Year to date guest gross margins improved 100 basis points, but non-GAAP adjusted gross margins improved by only 20 basis points in the year over year comparisons.
Gross margins were affected by the impact of cold in 19, Andy you ADW labor strike at GM, the negative impact of foreign currency translation and lower radio remote controls sales.
Items were partially offset by the benefit of a full year, a Greek on sales and increased sensor sales.
Non-GAAP adjusted gross margins exclude expenses for initiatives to reduce cost and improve profitability and purchase accounting adjustments in the applicable period.
Year to date gasoline administrations as a percentage of sales decreased 290 basis points year over year.
Positively impacted by lower stock based compensation expense, the physical 20 benefit from the fiscal 19 actions through and initiatives to reduce costs.
Lower acquisition costs, and selling and administrative expense attributable to gray can which is lower as a percentage of sales does not code as a whole.
Non-GAAP selling and administrative expenses as a percentage of sales, which exclude acquisition related costs operational improvements in long term incentive plan, a cooler joslin decreased by 50 basis points on a year to date basis.
Shifting to EBITDA on slide 11.
The company generated 54.5 million in the fiscal 24th quarter versus 46.1 million and the same period last year.
The EBITDA figure was accomplished in spite of the significant headwinds from the cold in 19, pandemic, which reduced sales by any of the millions.
Adjusting for expenses for initiatives to reduce overall cost and improve operational profitability acquisition related costs and long term incentive plan accrual adjustments in the applicable period.
Fourth quarter fiscal 19, adjusted EBITDA was 47.2 million as compared to 48.3 million in the current period.
Moving to the year to date EBITDA on slide 12.
The company generated 207.1 million in physical 20 versus 155.2 million in the same period last year in spite of the impact from Cowen 19, and the way W. strike at GM.
Adjusting for expenses for initiatives to reduce overall cost and improve operational profitability acquisition related costs and long term incentive plan accrual adjustments in the applicable period.
Fiscal 19, adjusted EBITDA was 184.9 million as compared to fiscal Twentys 203.7 million.
The improvement is primarily attributable to higher EBITDA from greater than 12 months of activity versus seven and a half months and new product launches, partially offset by offset by the adverse impact from Cowen 19, and the way W. strike at GM.
A few other financial items to review.
Year over year intangible asset amortization expense in physical 20 increased 2.9 million or 18%.
To 19 million due to amortization expense related to the great an acquisition, partially offset by lower amortization in the interface segment.
And physical 20, we invested money invested approximately 45 million and capital expenditures, mainly to support programs and launches in North America, Europe, and our facility expansion in India.
Year to date depreciation expense for physical 20 was 29.3 million.
Our year to date tax rate of 17% was higher than the 11.6 in fiscal 19.
This is mainly due to increased income in higher tax rate jurisdictions, an increase of tax reserves less investment tax credits and lower benefits realized from the finalization of the transition tax from U.S. tax reform.
Let's move to slide 13.
Free cash flow as defined as net income plus depreciation and amortization less capex for fiscal 20 was 126 point sixmillion as compared to 85.1 million in fiscal 19.
The cash flow figure represents a record for Matt though.
As shown on slide 14.
We have used some of our cash generation to pay down debt.
We have reduced net debt by nearly 75 million since the beginning of the fiscal year and since the acquisition of Greek had we've reduced our net debt by nearly 112 million.
We ended the fourth quarter with 217.3 billion in cash which includes the 100 million precautionary drawn the credit villas facility. We initiated in March our debt to EBITDA ratio, which is used for bank covenants is approximately 1.7.
This figure includes the impact of the proactive 100 million dollar draw we initiated.
Without a draw the ratio would have been 1.2.
Please move to slide 15.
So look at our key drivers to our EBITDA performance for fiscal 20.
Looking at the EBITDA based on our 155 million of even done fiscal 19.
And adding EBITDA from a full year, a breakdown, which is approximately 24 million.
Adding even after my new automotive in laundry program launches of approximately 18 million.
Benefits from the costs, we incurred in fiscal 19 for initiatives to reduce cost and improve profitability.
Around 11 million.
Adding back the costs, we incurred in fiscal 19 related to acquisitions and initiatives to reduce cost and improve profitability of around 25 million 29 million.
And increasing our anticipate our international government Grant income, which includes colder 19 says assistance of 6 million.
And subtracting the net net impact of coordinating the UAE W. labor strike and other collection that impacts to the business for a total of minus 36 million.
Does that concludes my comments [noise].
Ron Thank you very much time, we're ready to take question.
Thank you, Sir and ladies and gentlemen, if you'd like to ask a question at this time. It is star one on your Touchtone telephone. Please make sure. Your mute function is turned off to a liar signaled to reach our equipment again that star one on your Touchtone telephone at this time, if you would like to ask a question well take our first question from Ryan sick Dahl with Craig how.
Great. Thanks, guys for taking my questions.
Hi, good morning, or I was just.
First just want to.
Start this past year as far as challenging as it can get it seems with you ADW strike late last year Cobot shut downs more recently I know, you're not giving specific guidance and understandably, so but directionally is that reasonable to assume that key financial metrics can improve year over year.
Yes.
Did you say cannot ASM growth.
Paul can or can't dice. It can it seems like some of those headwinds will will pass here and should be.
Better year this year, but just curious directionally a any country can make on kind of key financial metrics revenue margins free cash flow et cetera.
I think.
Bye.
The first first quarter being.
No.
Well, it's somewhat unpredictable and being shut down for the.
The first after the quarter I I think were destiny.
Not to have as good a year as we had last year now having said that.
<unk>.
Once we get to more normalized production, then and we don't know when that's going to gonna be then we're going to see the benefits of everything we did in fiscal 20, but at this point without knowing what the elects to 345 months hold its hard to predict.
We are.
I'm going to see an upturn over over last year not me, perhaps on an annualized basis or a run rate base as we will.
But not a I can't say that at this time.
As we think about maybe a good segue as we think about current quarter were into Q1.
Maybe any commentary on the coal bed impacting what you're seeing kind of the production schedules for Q1 relative to Q4, and how much cobot, maybe impacted each of those quarters.
Well.
Cobot hits at the tail end <unk> really six weeks into the fourth that's six of them till mid March rabid much started tailor that and that was no simultaneous shutdown of of customers around the world. So they impact started then and then really continued until there's a few a few weeks ago <unk>.
As I said in my prepared remarks, we.
No those facilities closed we were we were shipping some.
Products some of more essential.
But as I think Brian said, though 85 million down in the Oh in the quarter.
And.
Really as of today. The those schedules are still erratic and then around the world. It's just not in the in the U.S. customers are.
Releasing product and then putting a whole lot enrollees another product.
Yeah.
They're trying to navigate consumer demand.
And I'm really when I look forward.
It's one thing for the automakers and our other customers to replenish their supplies, but we really have to see what the consumer demand is and we don't know that.
They're having some good sales month of the Gabrall's was was it.
It was good in the U.S. not as much in Europe, but as we look to the to the future. It's still very much unknown I believe we do expect it to stabilize at some point yes.
But the current.
Increase in Cobra cases in the U.S.
Gives me some pause on on that and we really don't know what the fall is going to bring.
Right.
I I think based on the on those levels.
The with the with the revenue decreases that were experienced it depending on how much that carries over into fiscal <unk>. The next fiscal year.
It's going to be hard to maintain margins and things of that nature, just due to the negative leverage we're gonna have from.
Decreased sales in to the degree of that is just happens to be other than the degree of the recovery whenever things stabilize so well we when we are doing as as we said we are taking actions to streamline the organization later.
Like we've done in years past.
And one of our based strategies is continuous improvement so.
We are taking actions to reduce our cost basis in our SNA, which will benefit us as as things start to more normalized weather, but the question is whether they they normalize.
Yeah, No. That's that's fair and appreciate the color switching over to interface.
Can you break down the benefit from the major appliance program launch, which is good to see.
Versus the higher legacy data solution product and then secondly is 19 million ish revenue that yet in the quarter has had a good run rate kind of thinking about.
The new a compliance program watch yet.
The 19 million Greg Macfarlane right also included our auto launches correct.
It did yeah. So we're sitting here at Ali a the interface. We we were at about 60 million for the year last year.
So.
Yeah, I think that would be.
With a new launches and everything in full launch.
The data they the the data solutions were up a little bit of they were considered.
Essential business and we were able to continue shipping. So we got some nice little bit of an uplift that during the quarter, but it's hard to say.
The rest of the year looked at it looked like into this fiscal year.
But it does it add to that.
We would expect that the.
Launch of the the who does a laundry program for our key customer will continue right now again that could be affected by consumer confidence.
But we would expect that they would have a.
All things being equal they would have a better year than than what they footprint and what they've they've had because a launch was so delayed.
Good.
One last one for me and then I'll turn it over.
Curious, what you can say or what potential or maybe you have content words already but some of the new.
Newcomers and he bees, so nicola revealing et cetera.
I mean comment on those.
We.
I can't comment exactly.
What the programs are.
We have really in programs.
And that's actually it Oh.
A key focus for us.
And then were.
[noise] asking someone to look up what we're doing what.
The other yeah. We're work, Okay Hum and we're working with was on both of those.
Although I can't tell you to to what degree we've got a hand slapped oh by another customer for doing that.
But we are working with them and we certainly are probably it's oh very well.
Yeah. That's it for me thanks, guys. Good luck.
Thanks.
And again, ladies and gentlemen, if you'd like to ask a question at this time. It is star one on your Touchtone telephone star one to ask a question.
We'll go next to Matt Sheerin with Stifel.
Yeah, Hey, it's Matt Sheerin I'm from Stifel. Thanks for taking my question your your commentary regarding.
The sort of erotic order environment from customers.
Not a surprise, but could you give us some view in terms of whether you think there's some inventory work down that's happening or is there more just a question Oh your customers trying to understand what their end demand is and that's why you're adjusting the order schedules.
Well I would say the ladder and.
So if anything what we've seen in the initial restart here is a inventory replenishment.
[noise] thing.
[noise] no.
[noise] punishment.
Normalized but oh.
Our view or navigate.
Hey.
Erratic.
Erratic demand.
I don't.
I want to minimize it but I don't think it's any more complicated than.
No the that no dealer traffic has been because as I said earlier, so that gives us some.
Optimism that Oh consumer confidence still remains a strong enough to.
Bolster auto sales.
Well. Thank you for that and if you look I know that I Hs is calling for significant production growth in Q3 calendar Q3, just on production in factories coming back.
How do you correlate to actual production in terms of when you see orders startup tech.
Oh very good question, we we have the benefit of customer relations and and normally in and all of your weekly and monthly really very reliable.
And and.
Perhaps as you go out three to six months I get a little softer, but we've seen tremendous volatility and even the weekly schedules, which is what causes us Uh huh.
I guess concern.
I agree that I, just saying Q3. So we also look at that we'll look at LMC won't digest them and and the predominant.
Benefit we have is looking at and every leases, but right now we don't see I don't see the correlation that when we I guess I think oh.
At some point, whether its Q O Q3 calendar.
It's also important.
That.
Any uptick in demand, we can respond to the.
We're ready we have looked at all of our supply lines.
All our so vendors.
And inventory and it once that increases then it will increase its not a matter of its wins.
If the customer once the product, we definitely can chip in and we had no customer delays.
Mills since the crisis started we we had some vendor issues, we had to deal with I'm talking across the board not just auto.
But we have not to lay the customer and we certainly weren't going forward. So if the demand is there we will definitely supply into the benefit from it.
Okay and in your lead times are at normal levels right now it could you remind us what they are.
Yeah, the lead times.
Yeah for the customer.
And it's done sometime manufacturing demand yeah. Okay. So you have inventory knobs, okay alright, okay. Thank thank so much for the color I appreciate it.
Oh.
And there appear to be no further questions in the queue. At this time I'd like turn to call back over to Mr. due to for any closing remarks.
Tom. Thank you very much will close with wishing everyone, a very safe and enjoyable independence a holiday. Thank you for listening today.
And ladies and gentlemen, this does conclude todays conference. We appreciate your participation you may disconnect at this time and have a great day.
[noise].
Oh.