Q1 2021 Methode Electronics Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to your Meso Electronics first quarter fiscal 2021 results conference call. All lines have been placed in the listen only mode at the floor will be open for your questions and comments. Following the presentation. As a reminder, today's call is being recorded if you should require assistance throughout the conference. Please.
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China, but it's my pleasure to turn the floor over to your host Vice President of Investor Relations Mr., Robert Cherry, Sir the floor is yours.
Thank you operator, good morning, and welcome to mess Electronics fiscal 2021 first quarter earnings Conference call.
During this call we're prepared a presentation titled fiscal 2021 first quarter financial results, which can be viewed on the webcast of this call were found at <unk> Dot com in the Investor section.
This conference call contains certain forward looking statements.
Reflect management's expectations regarding future events in 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.
Most of it undertakes no duty to update any forward looking statement to born the statement to actual results were changes in met those 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 met those filings with the Securities Exchange Commission.
Such as our annual inquiry reports.
Such many factors may include without limitation the following.
Impact from Pandemics, such as the Kobin 19 pin debit.
Dependence on the automotive appliance commercial vehicle computer and communications industries.
Dependence on a small number of large customers, including two large automotive customers.
Recognition of goodwill and long lived asset impairment charges.
Costs associated with restructuring activities.
International trade disputes, resulting in tears and our ability to mitigate yes.
Timing quality cost a new program launches.
He was deemed price pressure, including pricing reductions.
Failure to attract and retain qualified personnel.
The ability to successfully market and sell debeers surface products.
Currency fluctuations.
Mary risks related to conducting global operations.
Costs associated with environmental health and safety regulations [noise].
Ability to withstand business disruptions.
Ability to successfully benefit from acquisitions and divestitures.
That's been programs prior to the recognition of revenue.
And it's on the availability and price a material.
Dependence on our supply chain.
Judgments related to accounting for tax positions.
Income tax rate fluctuations.
Nobody to keep pace with rapid technological changes.
Just to our information technology systems.
Billy to avoid design for manufacturing defects.
Ability to compete effectively.
The ability to protect their intellectual property.
Excessive recent acquisitions indoor air ability to implement new profit from new applications of the acquired technology.
Ability to manage our debt levels in any restrictions there under <unk>.
Andy impact to interest expense from the replacement for modification of life War.
This time I like to turn call over to Mr., Don do that President and Chief Executive Officer.
Thank you Ron and good morning, everyone and thank you were doing yesterday for fiscal 2021 first quarter earnings conference call.
I'm joined today by run zoom as our Chief Financial Officer, both fraud, and <unk> opening comments and afterwards, we will take your questions.
Let's begin on slide four with the business highlights from the first quarter.
I'll start with the situation with Golden 19.
I continue to be proud over employees incredible commitment to Minnesota and supporting our efforts to remain a safe work environment.
All of our facilities that remain open to some degree through this challenging period and most of our hourly employees that returned to a full work week.
Our offices and systematic BB gun to reopen but we're also making prudent use of work.
Our office staff.
We anticipate that we will see some level of headwind risk and uncertainty from the Golden 19 pandemic throughout this fiscal year.
However, as I stress last quarter, we will continue to invest sort of business for long term girls.
Turning to the business performance.
While the quarter was clearly down due to the pandemic.
We saw significant rebound in automotive demand in the latter half of the quarter.
As you recall most of the auto Oems are effectively shut down in the first after the quarter and when reported a fourth quarter results. We were concerned about the stability of only in production schedules based on the pandemic circumstances.
Please turn to slide side for a summary of our financial results.
That those first quarter sales decreased 29.3%.
Our net income decreased 26.9%.
And our diluted earnings per share decreased 28%.
Fiscal quarter ended August 1st of 2020.
The resulting decremental net income margin of 10% was helped by cost reductions and operational efficiency initiatives.
The net income this quarter was also aided by discrete tax benefits from 7.8 million.
Adding back the discrete tax benefit the decremental net income margin would've been 19%.
Ron will provide more detail on this tax items you later.
Returning to the automotive business on slide six it was a particularly strong core for words he be in hybrid applications.
Seem towards the total annual expected sales of approximately 30 million.
Given our ongoing strategy to cross sell our technologies into the space. We now expect a high single digit percentage of our fiscal 2021 consolidated sales to come from E B and hybrid programs.
This is an area, where we're globally well decision.
And we anticipate continued growth.
I will share more on New awards, a little later.
Looking at our non automotive markets, we saw strength in data centers in appliances on a year over year basis.
However, other markets were negatively impacted by the endemic including industrial equipment, and commercial vehicles, which well down are seeing forecasts improve.
Operationally, we took significant absent any cost saving actions in the quarter to help mitigate the impact from the pandemic.
Despite incurring 1.5 million intensity restructuring costs <unk> expenses were reduced by 5.8 million year over year.
In regard to our balance sheet, we continue to have positive free cash flow and continue to reduce our debt in the quarter.
Our liquidity is strong and our leverage stable.
The strength and flexibility of our balance sheet allows us to consider multiple passes and best of the business in order to drive growth and shareholder return.
Moving to slide seven.
During the first quarter method, but the number of awards capitalizing on the strategic trends in vehicle electrification led lighting in data centers.
The awards identified here represent a cross section of the business wins in the quarter and represent over 36 million in annual business.
In electric vehicles, we want to words for lighting overhead council and busbar programs totaling over 22 million annually.
Hybrid vehicles were awarded lead frame in busbar growth programs totaling approximately 9 million anyway.
I would like to emphasize the these.
Well there that we are winning programs with Oems in the U.S. Europe and Asia.
In non E. B L. E D lighting, we were awarded programs for both auto and commercial vehicle applications.
Lastly, we're also participating in the barrels a day centers doesn't like cloud computing, but programs for Busbars and Pluggable modules.
As we have stated before method will continue to evolve its business with innovative new technology and products for emergency application in growing markets.
In the medical segment, our efforts to grow the their product line in the quarter continuing to be hampered by the postponement of elective surgeries due to Coca 19.
We are seeing some increased activity and believe that this business will return to a growth trajectory in the near future.
Looking forward, we're only providing sales guidance and only for our fiscal 2020 on second quarter due the market risk and uncertainty from the ongoing pandemic.
Well, we're not providing annual guidance at this time, we do intend to reassess any guidance as soon as demand stabilizes and we are confident with their customers forecasts.
Well, we've certainly seen strong demand over the last several months. It is not clear how much consumer confidence has returned versus the industry just satisfying pent up demand.
As we remain cautious.
As I shared last quarter, that's a took actions in the first quarter to consolidate operations and further streamline our organization in order to improve efficiencies and set the stage for continued growth.
These actions and any potential future actions will allow us to further improve our execution and being a better positioned to grow.
To conclude.
Given the current global macroeconomic situation and the significant headwinds faced by message throughout this past quarter.
I am extremely pleased that our strategy in team, we're able to deliver these results generated positive free cash flow and maintain a strong balance sheet our.
Our focus is on navigating the pandemic situation, while continuing to execute our long term strategy.
At this point I'll turn the call Overdrawn, who will provide more details on our financial results.
Thank you done and good morning, everyone.
First quarter sales decreased 29.3% or 79.3 million to 190.9 million in fiscal 21 from 270.2 million in fiscal 20.
Sales in the first quarter were negatively impacted by cobot 19, especially in the May through mid June timeframe.
The production shutdowns, mostly impacted the automotive and industrial segments.
The impact of foreign currency on sales was not significant in the quarter.
First quarter net income decreased 7.6 million to 20.7 million or 54 cents per share from 28.3 million or 75 cents per share in the same period last year.
First quarter net income benefited from a discrete tax benefit of 7.8 million and higher other income of 3.4 million, primarily due to colder 19 assistance of 2.9 million.
Please turn to slide nine.
The sales drivers from physical 21st quarter, two fiscal 21 first quarter, whereas that 92 million dollar sales reduction due to the impact of Coleman and other lower volumes, partially offset by $14 million of new launches.
Foreign currency translation reduced sales by 1 million.
The impact that segments, when mostly automotive and industrial.
Moving to slide 10.
First quarter gross margins were lower in fiscal 20, onest compared to fiscal 20, mainly due to the reduced sales due to the impact of cold it.
Product mix was also on favorable as 26.6% decrease.
Sales in the higher margin industrial segment negatively impacted consolidated gross margins.
Fiscal 21 first quarter margins were 23.6% as compared to 28.1% in the first quarter fiscal 20.
The physical 21 first quarter margins included one point Ninemillion Evans of restructuring expense.
Without the restructuring expense fiscal 21 first quarter gross margins would've been 24.6%.
First quarter, selling and administrative expenses as a percentage of sales increased 190 basis points year over year to 13.9% compared to 12% and the physical 21st quarter.
The physical 21 first quarter figure was attributable to decreased sales and restructuring expense at 1.5 million, partially offset by lower stock based compensation expense lower wages and associated benefits to the salary reductions and 40 work leaks and much lower travel expense there was.
No restructuring expense in the first quarter of fiscal twice.
Without a 1.5 million of restructuring expense, the selling and administrative expense as a percentage sales for the first quarter of physical 21 would have been 13.1%.
The company continues to monitor market factors and trends and we'll continue to evaluate possible additional actions to reduce overall costs and improve operational profitability, especially in the current cobot 19 environments.
In addition to the 3.4 million incurred in the first quarter from actions taken in the first quarter. The company currently expects an additional expense of 2 million in the second quarter from those first quarter actions.
The company May take additional actions in future periods based upon business conditions as required.
Moving to slide 11.
Net income was 20.7 million in the first quarter fiscal 21 as opposed to 28.3 million in the first quarter fiscal 20.
The main drivers between the fiscal years were lower sales due to cold and a favorable change in discrete tax items of 9.1 million and unfavorable change in restructuring expense of 3.4 million and the receipt of 2.9 million a foreign government assistance to the cold.
Shifting to EBITDA, a non-GAAP financial measure.
Fiscal first quarter 21, EBITDA was 29.3 million versus 50.3 million in the same period last year.
EBITDA was negatively impacted by the significant headwinds from the cold and 19 pandemic and included 3.4 million of restructuring expense.
A few other financial items to review.
Year over year, depreciation and intangible asset amortization expense increased slightly in the first quarter fiscal 21 to 12.1 million from 11.8 million in the first quarter fiscal 20.
In the first quarter fiscal 21, we invested approximately 11.6 million of Capex as compared to 13.2 million in the first quarter fiscal 20.
First quarter investment represents an approximate $45 million run rate for the current fiscal year, though it is too early to tell if the rate will be maintained throughout the remainder of the year.
However, we have a strong balance sheet and intend to utilize it during the scope it impacted year to make continued investment in our businesses to grow them organically in the future.
In addition, we continue to pursue opportunities for inorganic growth.
Intent is to come out of the Coleman pandemic stronger than we were when we went into the crisis by judiciously using our strong balance sheet to our long term advantage.
We had an income tax benefit of 5.1 million as compared to a tax expense of 7.3 million in the fiscal 21st quarter.
The main driver of the benefit in fiscal 21 was 7.8 million of discrete tax items recorded during the quarter.
Mainly due to investment tax credits and other credits earned in foreign jurisdictions.
In the fiscal first quarter of 20 fiscal year 20, there was a discreet tax expense of 1.3 million.
Without the discrete tax items, the physical 21 first quarter effective tax rate would have been 17.2% as compared to 16.6% in the same period last year.
As shown on slide 12.
We do leverage gross that by 2.3 million in the first quarter.
Since our acquisition of break had when adjusting for the 100 million precautionary credit facility draw in March 2020, we have reduced gross debt by nearly 108 million.
Net debt increased by 4 million in the first quarter fiscal 21 as compared to the physical 20, you're right.
We ended the first quarter, what 211 million in cash, which includes a 100 million precautionary drop on the credit facility in March.
Our debt to EBITDA ratio, which is used for a bank covenants is approximately 1.9.
This figure includes the impact of the precautionary 100 million dollar drop.
Without a draw.
The ratio would've been approximately one point.
Let's move to slide 13.
Free cash flow, a non-GAAP measure, which is now a defined as cash provided from operating activities minus capex as opposed to prior to fiscal 21, where it was defined as net income plus depreciation and amortization less capex.
Well the physical 21 first quarter free cash flow was 4.8 million, that's compared to 5.9 million and fair skinned 20.
As Don mentioned in his remarks, we're providing revenue guidance for the second quarter revenue range for the second quarter will be between 230 and 250 million.
Don that concludes my comments.
Thank you very much Melinda, we're ready to take questions.
The floor is now open for questions. If you do have a question. Please press Star then one on your telephone keypad to join the queue.
We're using the speakerphone. Please pick up your handset to provide the best sound quality again, ladies and gentlemen, if you do have a question or comment. Please press Star then one on your telephone keypad at this time.
And our first signal comes from Matt Sheerin with Stifel. Please go ahead.
[noise], yes, good morning, and thanks for taking my questions I just wanted to ask about.
The sort of near term order trends, you're seeing I know that on your last quarter.
Commentary out a couple of months ago, you talked about a week to week volatility in terms of customer order trends within automotive could you talk about what you're seeing now you obviously have some confidence I'm, giving 'em. Your your guidance. So any metrics you can give us and also by region.
In terms of demand trends that would be very helpful. Thank you.
I hesitate to use the word stabilize because.
While orders have abandoned I'd say more predictable the releases and source dosing allowed variability in mix.
What is causing us to too.
I'll be concerned because usually and in automotive.
And any other regions you're.
Schedules for the first.
Let's say two or three months in are you are usually very stable and we were still seeing volatility in that they have increased which is no gives us.
The ability to give at least sales guidance or for the quarter, but there still is enough uncertainty as we go forward and as I mentioned in my remarks, how much of that as Pat pent up demand.
Versus the automotive business worldwide, returning or just some stability so.
We were were cautious going forward to your question about the region's.
U.S. has I believe <unk> the automakers are moving back up.
That drives.
Portion of our automotive sales amount, but I'll hope we will say they are.
The mix is variable in Europe. It it really is a month to month.
Type business right now again, you usually see three months I'm pretty steady forecast. It is still very volatile some months or better than others, but I will say that it has it has picked up.
And then in China, we see growth, there and I hesitate to say back to its on all but that's probably a good way Oh I'm, putting so he can combine all of that.
Want to say that I'm cautiously optimistic I I, just feel better about where we are we're versus one way or the beginning in the first quarter. There. It was very difficult to forecast anything and it's only spend on the last maybe two months, where things are really gotten to some.
Oh predictability.
Yeah, I would I would say too in terms of just like a global macro it came out yesterday or today that August and Saar in the U.S. unless the equivalent of annualized at some point Threemillion, which has a from before but car registrations in several leading European countries came out today was down so that can be a precursor for.
Decreased demand than that so you know getting a little bit better visibility, but certainly not to the level of visibility they had going out with a high that with as much confidence as we had before so I think a sweet spot as we were able to comment on the second quarter, but as far as we can go and Matt. This is equal we're anxious to see.
No once.
Replenishment is complete and I don't know exactly what percentage or it is right now I am not very scientific but I have drilled by dealer lots in Wisconsin and in Illinois in.
They are pretty pretty sparse yet so we really have to see what does a consumer can do maybe in our third quarter. Maybe after the first of the year I think that'll really tell what what things are going to look like going forward.
Fair enough that that's a quite helpful and just as a follow up regarding your commentary on the E V and hybrid isn't it sounds like there's sort of an acceleration there perhaps because of your program wins, but but also you know speaks to the investments by your your cost.
Summers in terms of making that priority despite everything going on in Kobe related I mean is that what you're seeing from your customers.
Yeah.
We're not seeing customers back off on launches didnt in any way shape or form.
And even even in.
March April may the customer was good thing he stay focused on.
Perhaps there's a there's a program to lane of a little bit, but nothing no nothing a significant so that remains a focus for them.
We've been in the power distribution business and Busbars since the days of I'd be M. A mainframe so.
We were well suited to provide busbars and battery disconnecting units and someone to too.
The be many manufacturers, so and we can provide that on three continents.
Under the same.
Manufacturing quality level so.
<unk>.
We see that continuing to grow will probably grow at the at the market rate and I'll, probably a little bit little bit better.
So it's an area that we plan to be in research and we're seeing the that strategy. We started years ago is starting to pan out.
Okay, Alright, thank you very much.
Thank you. Thank you.
Next question comes from Ryan Sick Dahl with Craig Hallum Capital. Please go ahead.
Great. Thanks, guys for taking my questions are good morning.
Just curious I know, there's still quite a bit of uncertain sounds like a little better visibility than they do or three months ago, but as far as gross margins in margins go as you look at production from Oems and you guys ramping back up at reasonable get back to kind of historical.
Margins in Q, you know next quarter. The current quarter ran or is it will take a little bit longer to get back there.
I'll, let Ron come a little bit on it but it is all.
Volume related that there's nothing that systematically that would would let's say, we couldn't oh shouldn't get back to the to those levels when.
That's a little harder to predict but is it is volume really really there's no. There's no. There's no issue that we have and rubber and there's also a degree of mix with the with the class eights.
[noise] being down year over year, and that's you know.
The higher margin business for us.
So to the extent that that decreases faster than you know or comes on track.
At a rate different than let's say the automotive segment I'm there could be a mix.
You know impact of that as well.
Got it and then just wanted to circle back to kind of that you'd be awards in the quarter.
But were those specifically for existing customers for the new Oems and then as you look at that pipeline.
And I know you mentioned you guys expect to grow can inline to better but how are you guys see when in those.
Negotiations bids relative to historical win rates.
For for the established E. the players and then I think.
We do.
We do quite well I mean, we do we track.
Every quote the Metro does worldwide, we track wins and losses.
And in the area.
We've done quite well.
If you think about it.
Well I said earlier, we've been in the Busbar business along time, Bob we bring the automotive pedigree along with that so so that has that gives us an advantage over maybe someone else's it can make a busbar, but.
Again, they make it to auto quality standards that helps us.
Quite a bit.
And then.
And I mentioned, the established TV, but we do.
Provide product to the startups and we were cautious on.
Accounts receivable, but we're very Oh, we're very well situated there and there is hard to predict which one will.
I'll be the winter in that but.
So I think we're pretty well covered in the market and we continue to develop.
Uh huh.
Products, it's sort of the market.
Last one for me and then ill hop back I think you, but just on capital allocation sounds like M&A is inorganic is a pretty big focus, but how do you think about kind of M&A multiples today versus where your stock trades and potentially repurchasing shares instead.
As a tough question.
My first choice is a accretive acquisition.
I think long term that's.
He is higher dividends shirt from other than it does greed stock repurchases, but having said that.
As our balance sheet grows at a certain point.
I wouldn't rule that out we've done in the past.
But I.
I don't want to speak for the board, but I think we'll feel that that.
Organic growth is critical but also a inorganic to do acquisitions.
The.
Prices have not dropped and then we haven.
Announced an acquisition.
I haven't seen anything that the that fits prices are high.
Interest rates are low.
Yes. The pandemic continues into two next year will will some of the the opportunities be.
Lets costly.
Finally.
Hi.
I wouldn't rule out as I My bad So that's that's what we've done it before.
Our emphasis is on growing the business.
Great. Thanks, guys. Good luck.
Thank you.
At this time there are no further signals, we turned to Mr. Don do does for closing remarks.
Thank you Melinda we will conclude the call. Thank everybody for listening in wish everyone a save an enjoyable.
Thank you all.
[noise]. Thank you. This does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time has a great day.
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